RYDEX VARIABLE TRUST, N-1A/A, 1998-10-16

RYDEX VARIABLE TRUST
N-1A/A, 1998-10-16

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1998

FILE NO. 333-57017
FILE NO. 811-08821
- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (X)

PRE-EFFECTIVE AMENDMENT NO. 1 (X)

and

REGISTRATION STATEMENT UNDER THE INVESTMENT ACT OF 1940 (X)

AMENDMENT NO. 1 (X)

RYDEX VARIABLE TRUST
(Exact Name of Registrant as Specified in Charter)

C/O 6116 EXECUTIVE BOULEVARD, SUITE 400
ROCKVILLE, MARYLAND 20852
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)

Registrant's Telephone Number, including Area Code (301) 468-8520

ALBERT P. VIRAGH, JR.
RYDEX
6116 EXECUTIVE BOULEVARD, SUITE 400
ROCKVILLE, MARYLAND 20852
(Name and Address of Agent for Service)

Copies to:

JOHN H. GRADY, Jr., ESQUIRE
Morgan, Lewis & Bockius LLP
1800 M STREET, N.W.
WASHINGTON, D.C. 20036

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

/X/ Approximate date of Proposed Public Offering:
As soon as practicable after the
effective date of this Registration Statement

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

Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a)
may determine.

<PAGE>

RYDEX-Registered Trademark-
INVESTMENT FLEXIBILITY
FOR INSTITUTIONAL MONEY MANAGERS

RYDEX VARIABLE TRUST
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852
1-800-820-0888 301-468-8520

BENCHMARK FUNDS SECTOR FUNDS
- --------------- ------------
NOVA FUND BANKING FUND
URSA FUND BASIC MATERIALS FUND
OTC FUND BIOTECHNOLOGY FUND
ARKTOS FUND CONSUMER PRODUCTS FUND
PRECIOUS METALS FUND ELECTRONICS FUND
U.S. GOVERNMENT BOND FUND ENERGY FUND
JUNO FUND ENERGY SERVICES FUND
FINANCIAL SERVICES FUND
MONEY MARKET FUND HEALTH CARE FUND
LEISURE FUND
U.S. GOVERNMENT MONEY MARKET FUND RETAILING FUND
TECHNOLOGY FUND
TELECOMMUNICATIONS FUND
TRANSPORTATION FUND

Rydex Variable Trust (the "Trust") is a mutual fund complex with twenty-two
separate investment portfolios (the "Rydex Variable Funds"), all of which are
described in this Prospectus (the "Funds"). Shares of the Funds are available
exclusively for variable annuity and variable life insurance products, as well
as for certain pension, profit sharing and other retirement plans. Variable
life and variable annuity account investors should also review the separate
account prospectus prepared by their insurance company.

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
TRUST'S SHARES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

November 1, 1998
PROSPECTUS
<PAGE>

TABLE OF CONTENTS

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benchmark Funds
Nova Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ursa Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTC Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arktos Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Precious Metals Fund . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government Bond Fund. . . . . . . . . . . . . . . . . . . . . . .
Juno Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sector Funds
Banking Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic Materials Fund . . . . . . . . . . . . . . . . . . . . . . . . .
Biotechnology Fund . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Products Fund . . . . . . . . . . . . . . . . . . . . . . . .
Electronics Fund . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy Services Fund . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Services Fund. . . . . . . . . . . . . . . . . . . . . . . .
Health Care Fund . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leisure Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retailing Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telecommunications Fund. . . . . . . . . . . . . . . . . . . . . . . .
Transportation Fund. . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government Money Market Fund . . . . . . . . . . . . . . . . . . . . .
More Information About Risk . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder Information . . . . . . . . . . . . . . . . . . . . . . . . . .
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends, Distributions and Taxes. . . . . . . . . . . . . . . . . . . . .
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benchmark Information . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information . . . . . . . . . . . . . . . . . . . . . .Back Cover

2
<PAGE>

INTRODUCTION

BENCHMARK FUNDS

The Benchmark Funds' objectives are to match, exceed or perform the opposite of
the performance of a specific index or market indicator. The benchmark used by
each Fund is set forth below:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FUND BENCHMARK
- --------------------------------------------------------------------------------
<S> <C>
Nova Fund 150% of the performance of the S&P 500 Composite
Stock Price Index-TM- (SPX)
- --------------------------------------------------------------------------------
URSA FUND INVERSE (OPPOSITE) OF THE S&P 500 COMPOSITE STOCK
PRICE INDEX-TM- (SPX)
- --------------------------------------------------------------------------------
OTC Fund NASDAQ 100 Index-TM- (NDX)
- --------------------------------------------------------------------------------
ARKTOS FUND INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE
NASDAQ 100 INDEX-TM- (NDX)
- --------------------------------------------------------------------------------
Precious Metals Fund Philadelphia Stock Exchange Gold/Silver Index-TM-
(XAU)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT BOND FUND 120% OF THE PRICE MOVEMENT OF THE LONG TREASURY
BOND
- --------------------------------------------------------------------------------
Juno Fund Inverse (opposite) of the price movement of the
Long Treasury Bond
- --------------------------------------------------------------------------------
</TABLE>

A BRIEF GUIDE TO THE BENCHMARKS.

THE S&P 500 COMPOSITE STOCK PRICE INDEX-TM- (S&P 500 INDEX). The S&P 500 Index
is a capitalization-weighted index composed of 500 common stocks, which are
chosen by the Standard & Poor's Corporation ("S&P"), on a statistical basis to
be included in the S&P 500 Index.

THE NASDAQ 100 INDEX-TM-. The NASDAQ 100 Index-TM- is a capitalization-weighted
index composed of 100 of the largest non-financial companies listed on the
National Association of Securities Dealers Automated Quotations System.

THE PHILADELPHIA STOCK EXCHANGE GOLD/SILVER INDEX-TM- (XAU INDEX). The XAU
Index is a capitalization-weighted index featuring securities of ten widely-held
companies in the gold and silver mining and production industry, or companies
that invest in such mining and production companies.

THE LONG TREASURY BOND. The Long Treasury Bond is the current U.S. Treasury
bond with the longest maturity. Currently, the longest maturity of a U.S.
Treasury bond is 30 years.

SECTOR FUNDS

In attempting to replicate the performance of individual economic sectors, each
Sector Fund invests substantially all of its assets in a portfolio of equity
securities of issuers doing business in the economic sector that is included in
the Fund's name.

ALL FUNDS

- - are not federally insured - are not bank deposits
- - are not guaranteed by any - are not guaranteed to
government agency achieve their objectives

INVESTING IN ANY OF THE FUNDS INVOLVES RISKS THAT MAY ADVERSELY AFFECT THE
FUNDS' NET ASSET VALUE, YIELD, AND TOTAL RETURN. YOU MAY LOSE MONEY. Each Fund
(except the U.S. Government Money Market Fund) is non-diversified.
Non-diversified funds may invest in the securities of a relatively few number of
issuers. If the assets of a Fund are invested in a limited number of issuers,
the Fund may be more susceptible to a single adverse economic or regulatory
occurrence.

3
<PAGE>

FUND INFORMATION - NOVA FUND

FUND OBJECTIVE

The NOVA FUND seeks to provide investment returns that are 150% of the S&P 500
Index.

PORTFOLIO INVESTMENTS

Unlike a traditional index fund, as its primary investment strategy, the Fund
invests to a significant extent in futures contracts and options on: securities,
futures contracts, and stock indexes. On a day-to-day basis, the Fund holds
U.S. Government securities to collateralize these futures and options contracts.
Futures and options contracts, if used properly, may enable the Fund to meet its
objective without investing directly in the securities included in the Index.
The Fund also may purchase equity securities and enter into repurchase
agreements.

RISK CONSIDERATIONS

The Nova Fund is subject to a number of risks that will affect the value of its
shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's futures and options contracts and other securities may
fluctuate drastically from day-to-day.

- LEVERAGING RISK - The Fund invests a percentage of its assets in
leveraged instruments, such as certain futures and options contracts.
The more the Fund invests in these leveraged instruments, the more
this leverage will magnify the Fund's gains or losses on those
investments.

- TRACKING ERROR RISK - The Advisor may not be able to match the
performance of the Fund's benchmark.

If the Fund meets its objective, the value of the Fund's shares will tend to
increase by 150% of the value of any increase in the S&P 500 Index. However,
when the value of the S&P 500 Index declines, the value of the Fund's shares
should also decrease by 150% of the value of any decrease in the Index.

4
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

NOVA FUND PERFORMANCE

The table below shows how the Nova Fund's returns for certain periods compare to
those of a broad-based securities market index. Of course, the Fund's past
performance does not necessarily indicate how the Fund will perform in the
future.

For periods prior to November 1998, when the Fund began its operations,
performance shown is for the Nova Subaccount of The Rydex Advisor Variable
Annuity Account, the Fund's predecessor, and includes insurance-related charges
that had the effect of reducing returns. The Fund's predecessor commenced
operations on May 7, 1997.

AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDING DECEMBER 31, 1997)(1)

<TABLE>
<CAPTION>
Nova Fund S&P 500 Index(2)
--------------------------------------
<S> <C> <C>
Since Commencement of Operations 22.11% 18.98%
</TABLE>

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

(1) These figures assume the reinvestment of dividends and capital gains
distributions.

(2) The S&P 500 Index is an unmanaged index that is a widely recognized
indicator of general stock market performance.

<TABLE>
<CAPTION>
FEES AND EXPENSES OF THE FUND+
This table describes the fees and expenses that you may pay if you buy and hold Shares of the NOVA FUND.
- -------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.75%
Distribution (12b-1) Fees None
Other Expenses 1.45%
-----
Total Annual Fund Operating Expenses* 2.20%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.20%, OR LESS,
BUT, IN THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER
WILL WAIVE FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT
EXCEED 2.20%.

EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE NOVA
FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

THE EXAMPLE ASSUMES THAT YOU INVEST $10,000 IN THE FUND FOR THE TIME PERIOD
INDICATED AND THEN REDEEM ALL OF YOUR SHARES AT THE END OF THOSE PERIODS. THE
EXAMPLE ALSO ASSUMES THAT YOUR INVESTMENT HAS A 5% RETURN EACH YEAR AND THAT THE
FUND'S OPERATING EXPENSES REMAIN THE SAME. ALTHOUGH YOUR ACTUAL COSTS MAY BE
HIGHER OR LOWER, BASED ON THESE ASSUMPTIONS YOUR COST WOULD BE:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$223 $688 $1,180 $2,534
</TABLE>

5
<PAGE>

FUND INFORMATION - URSA FUND

FUND OBJECTIVE

The URSA FUND seeks to provide investment results that will inversely correlate
to the performance of the S&P 500 Index.

PORTFOLIO INVESTMENTS

Unlike a traditional index fund, the Fund's benchmark is to perform exactly
opposite the S&P 500 Index, and the Fund will generally not own the securities
included in the Index. Instead, as its primary investment strategy, the Fund
invests to a significant extent in futures contracts and options on: securities,
futures contracts, and stock indexes. On a day-to-day basis, the Fund holds
U.S. Government securities to collateralize these futures and options contracts.
The Fund also may enter into repurchase agreements and sell securities short.

RISK CONSIDERATIONS

The Ursa Fund is subject to a number of risks that will affect the value of its
shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's futures and options contracts and other securities may
fluctuate drastically from day-to-day.

- TRACKING ERROR RISK - The Advisor may not be able to match the
performance of the Fund's benchmark.

If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the S&P 500 Index is decreasing. When
the value of the S&P 500 Index is increasing, however, the value of the Fund's
shares should decrease by an inversely proportionate amount (E.G., if the S&P
500 Index goes up by 10%, the value of the Fund's shares should go down by 10%).

6
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

URSA FUND PERFORMANCE

The table below shows how the Ursa Fund's returns for certain periods compare to
those of a broad-based securities market index. Of course, the Fund's past
performance does not necessarily indicate how the Fund will perform in the
future.

For periods prior to November 1998, when the Fund began its operations,
performance shown is for the Ursa Subaccount of The Rydex Advisor Variable
Annuity Account, the Fund's predecessor, and includes insurance-related charges
that had the effect of reducing returns. The Fund's predecessor commenced
continuous operations on June 10, 1997.

AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDING DECEMBER 31, 1997)(1)

<TABLE>
<CAPTION>
Ursa Fund S&P 500 Index(2)
-----------------------------------------
<S> <C> <C>
Since commencement of continuous operations -13.48% 12.15%
</TABLE>

(1) These figures assume the reinvestment of dividends and capital gains
distributions. Prior to the commencement of continuous operations, due to
the nature of the investment activity, the Fund's predecessor experienced
periods with zero net assets. Periods of operation, including returns for
each discrete period, were as follows: May 7, 1997 to May 21, 1997
(-3.65%); May 27, 1997 to June 3, 1997 (.69%); and June 10, 1997 to
December 31, 1997 (-13.48%).

(2) The S&P 500 Index is an unmanaged index that is a widely recognized
indicator of general stock market performance.

<TABLE>
<CAPTION>
FEES AND EXPENSES OF THE FUND+
This table describes the fees and expenses that you may pay if you buy and hold Shares of the URSA FUND.
- -------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.90%
Distribution (12b-1) Fees None
Other Expenses 1.40%
-----
Total Annual Fund Operating Expenses* 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

*TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.30%.

EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE URSA
FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$233 $718 $1,230 $2,636
</TABLE>

7
<PAGE>

FUND INFORMATION - OTC FUND

FUND OBJECTIVE

The OTC FUND seeks to provide investment results that correspond to a benchmark
for over-the-counter securities. The Fund's current benchmark is the NASDAQ 100
Index-TM-.

PORTFOLIO INVESTMENTS

The Fund invests principally in securities of companies included in the NASDAQ
100 Index-TM-. It also may invest in other instruments whose performance is
expected to correspond to that of the Index, and may engage in futures and
options transactions. The Fund may also purchase U.S. Government securities and
enter into repurchase agreements.

RISK CONSIDERATIONS

The OTC Fund is subject to a number of risks that will affect the value of its
shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- TRACKING ERROR RISK - The Advisor may not be able to match the
performance of the Fund's benchmark.

If the Fund meets its objective, the value of the Fund's shares will tend to
increase by the amount of the increase in value of the NASDAQ 100 Index-TM-.
However, when the value of the NASDAQ 100 Index-TM- declines, the value of the
Fund's shares should also decrease by the amount of the decrease in value of the
Index.

8
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

OTC FUND PERFORMANCE

The table below shows how the OTC Fund's returns for certain periods compare to
those of a broad-based securities market index. Of course, the Fund's past
performance does not necessarily indicate how the Fund will perform in the
future.

For periods prior to November 1998, when the Fund began its operations,
performance shown is for the OTC Subaccount of The Rydex Advisor Variable
Annuity Account, the Fund's predecessor, and includes insurance-related charges
that had the effect of reducing returns. The Fund's predecessor commenced
operations on May 7, 1997.

AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDING DECEMBER 31, 1997)(1)

OTC Fund NASDAQ 100 Index-TM-(2)
-----------------------------------------
<S> <C> <C>
Since commencement of operations 6.54% 8.96%
</TABLE>

- --------------------
(1) These figures assume the reinvestment of dividends and capital gains
distributions.

(2) The NASDAQ 100 Index-TM- is an unmanaged index that is a widely recognized
indicator of OTC market performance.

FEES AND EXPENSES OF THE FUND+
This table describes the fees and expenses that you may pay if you buy and hold Shares of the OTC FUND.
- -------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.75%
Distribution (12b-1) Fees None
Other Expenses 1.45%
-----
Total Annual Fund Operating Expenses* 2.20%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.20% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.20%.

EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE OTC
FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$223 $688 $1,180 $2,534
</TABLE>

9
<PAGE>

FUND INFORMATION - ARKTOS FUND

FUND OBJECTIVE

The ARKTOS FUND seeks to provide investment results that will match the
performance of a specific benchmark. The Fund's current benchmark is the
inverse of the performance of the NASDAQ 100 Index-TM-.

PORTFOLIO INVESTMENTS

Unlike a traditional index fund, the Fund's benchmark is to perform exactly
opposite the NASDAQ 100 Index-TM-, and the Fund will not own the securities
included in the Index. Instead, as its primary investment strategy, the Fund
engages to a significant extent in short sales of securities, futures contracts
and options on: securities, futures contracts, and stock indexes. On a
day-to-day basis, the Fund holds U.S. Government securities to collateralize
these futures and options contracts. The Fund also may enter into repurchase
agreements.

RISK CONSIDERATIONS

The Arktos Fund is subject to a number of risks that will affect the value of
its shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's futures and options contracts and other securities may
fluctuate drastically from day-to-day.

- TRACKING ERROR RISK - The Advisor may not be able to match the
performance of the Fund's benchmark.

If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the NASDAQ 100 Index-TM- is decreasing.
When the value of the NASDAQ 100 Index-TM- is increasing, however, the value of
the Fund's shares should decrease by an inversely proportionate amount (E.G., if
the NASDAQ 100 Index-TM- goes up by 10%, the value of the Fund's shares should
go down by 10%).

10
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

As of September 1, 1998, the Arktos Fund had not commenced operations, and does
not have a performance history.

FEES AND EXPENSES OF THE FUND+

This table describes the fees and expenses that you may pay if you buy and hold Shares of the ARKTOS FUND.
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
Management Fees 0.90%
Distribution (12b-1) Fees None
Other Expenses* 1.40%
-----
Total Annual Fund Operating Expenses** 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* OTHER EXPENSES ARE ESTIMATED.

** TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.30%.

EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE ARKTOS
FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS
- ------ -------
<S> <C>
$233 $718
</TABLE>

11
<PAGE>

FUND INFORMATION - PRECIOUS METALS FUND

FUND OBJECTIVE

The PRECIOUS METALS FUND seeks to provide investment results that correspond to
a benchmark primarily for metals-related securities. The Fund's current
benchmark is the XAU Index.

PORTFOLIO INVESTMENTS

The Fund invests in securities of companies included in the XAU Index, as well
as securities whose performance is expected to track the performance of the XAU
Index. The Fund also may engage in futures and options transactions, purchase
ADRs and U.S. government securities, and enter into repurchase agreements. The
Fund may also invest a portion of its assets in securities of foreign issuers.

RISK CONSIDERATIONS

The Precious Metals Fund is subject to a number of risks that will affect the
value of the Fund's shares, including:

- CONCENTRATION RISK - The risk that the relatively few securities of
issuers in the same industry (E.G., mining) that the Fund purchases
will underperform the market as a whole. To the extent that the Fund's
investments are concentrated in issuers conducting business in the
same industry, the Fund is subject to legislative or regulatory
changes, adverse market conditions and/or increased competition
affecting that industry, as well as to the volatility of global prices
for precious metals. The prices of precious metals may fluctuate
widely due to changes in inflation or inflation expectations, currency
fluctuations, speculation, worldwide demand and political developments
in precious metals producing countries.

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- TRACKING ERROR RISK - The Advisor may not be able to match the
performance of the Fund's benchmark.

If the Fund meets its objective, the value of the Fund's shares will tend to
increase by the amount of the increase in value of the XAU Index. However, when
the value of the XAU Index declines, the value of the Fund's shares should also
decrease by the amount of the decrease in value of the Index.

12
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

PRECIOUS METALS FUND PERFORMANCE

The table below shows how the Precious Metals Fund's returns for certain periods
compare to those of a broad-based securities market index. Of course, the
Fund's past performance does not necessarily indicate how the Fund will perform
in the future.

For periods prior to November 1998, when the Fund began its operations,
performance shown is for the Precious Metals Subaccount of The Rydex Advisor
Variable Annuity Account, the Fund's predecessor, and includes insurance-related
charges that had the effect of reducing returns. The Fund's predecessor
commenced operations on May 29, 1997.

AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDING DECEMBER 31, 1997)(1)

Precious Metals Funds XAU Index(2)
-------------------------------------------
<S> <C> <C>
Since Commencement of Operations -29.85% -30.15%
</TABLE>

- --------------------
(1) These figures assume the reinvestment of dividends and capital gains
distributions.

(2) The XAU Index is an unmanaged index that is a widely recognized indicator
of precious metals sector performance.

FEES AND OPERATING EXPENSES OF THE FUND+
This table describes the fees and expenses that you may pay if you buy and hold Shares of the PRECIOUS METALS FUND.
- -----------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.75%
Distribution (12b-1) Fees None
Other Expenses 1.45%
-----
Total Annual Fund Operating Expenses* 2.20%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

*TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.20% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.20%.

EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE
PRECIOUS METALS FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$223 $688 $1,180 $2,534
</TABLE>

13
<PAGE>

FUND INFORMATION - U.S. GOVERNMENT BOND FUND

FUND OBJECTIVE

The U.S. GOVERNMENT BOND FUND seeks to provide investment results that
correspond to a benchmark for U.S. Government securities. The Fund's current
benchmark is 120% of the price movement of the Long Treasury Bond.

PORTFOLIO INVESTMENTS

The Fund invests principally in U.S. Government securities, futures contracts,
and options. Some of the Fund's U.S. Government securities will be used to
collateralize these futures and options. Futures and options contracts, if used
properly, may enable the Fund to meet its objective by increasing the Fund's
exposure to the securities included in its benchmark. In addition, the Fund may
enter into transactions involving zero coupon U.S. Treasury bonds and repurchase
agreements.

RISK CONSIDERATIONS

The U.S. Government Bond Fund is subject to a number of risks that will affect
the value of its shares, including:

- FIXED INCOME RISK - The Fund's fixed income investments will change in
value in response to interest rate changes and other factors. In
addition, the value of securities with longer maturities will
fluctuate more in response to interest rate changes.

- TRACKING ERROR RISK - The Advisor may not be able to match the
performance of the Fund's benchmark.

If the Fund meets its objective, the value of the Fund's shares should increase
by 120% of any price increase by the Long Treasury Bond. In contrast, when the
price of the Long Treasury Bond declines, the value of the Fund's shares should
decline by 120% of any price decline of the Long Treasury Bond.

14
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

U.S. GOVERNMENT BOND FUND PERFORMANCE

The table below shows how the U.S. Government Bond Fund's returns for certain
periods compare to those of a broad-based securities market index. Of course,
the Fund's past performance does not necessarily indicate how the Fund will
perform in the future.

For periods prior to November 1998, when the Fund began its operations,
performance shown is for the U.S. Government Bond Subaccount of The Rydex
Advisor Variable Annuity Account, the Fund's predecessor, and includes
insurance-related charges that had the effect of reducing returns. The Fund's
predecessor commenced continuous operations on August 18, 1997.

AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDING DECEMBER 31, 1997)(1)

<TABLE>
<CAPTION>
U.S. Gov't Bond Fund Lehman Long Treasury Index(2)
----------------------------------------------------------
<S> <C> <C>
Since Commencement of continuous operations 9.84% 8.67%
operations
</TABLE>

(1) These figures assume the reinvestment of dividends and capital gains
distributions. Prior to the commencement of continuous operations, due to
the nature of the investment activity, the Fund's predecessor experienced
periods with zero net assets. Periods of operation, including returns for
each discrete period, were as follows: May 29, 1997 to June 5, 1997
(1.45%); June 24, 1997 to July 14, 1997 (2.32%); July 21, 1997 to August
12, 1997 (-3.70%); and August 18, 1997 to December 31, 1997 (9.84%).

(2) The Lehman Long Treasury Index is an unmanaged index that is a widely
recognized indicator of U.S. government bond performance.

<TABLE>
<CAPTION>
FEES AND EXPENSES OF THE FUND+
This table describes the fees and expenses that you may pay if you buy or hold Shares of the U.S. GOVERNMENT BOND FUND.
- -----------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.50%
Distribution (12b-1) Fees None
Other Expenses 1.30%
-----
Total Annual Fund Operating Expenses* 1.80%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

*TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 1.80% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 1.80%.

EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE BOND
FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$183 $566 $975 $2,116
</TABLE>

15
<PAGE>

FUND INFORMATION - JUNO FUND

FUND OBJECTIVE

The JUNO FUND seeks to provide total returns that will inversely correlate to
the price movements of a benchmark for U.S. Treasury debt instruments or futures
contract on a specified debt instrument. The Fund's current benchmark is the
inverse of the price movement of the Long Treasury Bond.

PORTFOLIO INVESTMENTS

Unlike a traditional fund, the Fund's benchmark is to perform exactly opposite
the Long Treasury Bond. As its primary investment strategy, the Fund enters
into short sales and engages in futures and options transactions. On a
day-to-day basis, the Fund holds U.S. Government securities to collateralize
these obligations. The Fund also may enter into repurchase agreements.

RISK CONSIDERATIONS

The Juno Fund is subject to a number of risks that will affect the value of its
shares, including:

- TRACKING ERROR RISK - The Advisor may not be able to match the
performance of the Fund's benchmark.

If the Fund meets its objective, the value of the Fund's shares will tend to
increase during periods when the price of the Long Treasury Bond decreases.
When the price of the Long Treasury Bond increases, however, the value of the
Fund's shares should decrease by an inversely proportionate amount (E.G., if the
price of the Long Treasury Bond increases by 2%, the value of the Fund's shares
should go down by 2%).

16
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

JUNO FUND PERFORMANCE

The information below provides certain performance information for the Juno
Fund. Of course, the Fund's past performance does not necessarily indicate how
the Fund will perform in the future.

For periods prior to November 1998, when the Fund began its operations,
performance shown is for the Juno Subaccount of The Rydex Advisor Variable
Annuity Account, the Fund's predecessor, and includes insurance-related charges
that had the effect of reducing returns. The Fund's predecessor commenced
continuous operations on March 4, 1998. Prior to that time, due to the nature
of the investment activity, the Fund's predecessor experienced periods with zero
net assets. For the period ended December 31, 1997, periods of operation,
including returns for each discrete period, were as follows: May 7, 1997 to June
3, 1997 (-1.41%); June 16, 1997 to July 2, 1997 (-.09%); July 7, 1997 (-.46%);
July 24, 1997 to August 11, 1997 (2.82%); August 26, 1997 to October 19, 1997
(-2.01%); and October 22, 1997 to December 11, 1997 (-4.14%).

FEES AND EXPENSES OF THE FUND+
This table describes the fees and expenses that you may pay if you buy and hold Shares of the JUNO FUND.
- -------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.90%
Distribution (12b-1) Fees None
Other Expenses 1.40%
-----
Total Annual Fund Operating Expenses* 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

*TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL
WAIVE FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED
2.30%.

EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE JUNO
FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$233 $718 $1,230 $2,636
</TABLE>

17
<PAGE>

FUND INFORMATION - BANKING FUND

FUND OBJECTIVE

The BANKING FUND seeks to provide capital appreciation by investing in companies
that are involved in the banking sector, including commercial banks (and their
holding companies) and savings and loan institutions ("Banking Companies").

PORTFOLIO INVESTMENTS

The Fund invests substantially all of its assets in a portfolio of equity
securities of Banking Companies that are traded in the United States. The Fund
may also invest in futures and options transactions, purchase ADRs and U.S.
Government securities, and enter into repurchase agreements.

RISK CONSIDERATIONS

The Banking Fund is subject to a number of risks that will affect the value of
its shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the same economic sector (e.g., banking) that the Fund purchases will
underperform the market as a whole. To the extent that the Fund's
investments are concentrated in issuers conducting business in the
same economic sector, the Fund is subject to legislative or regulatory
changes, adverse market conditions and/or increased competition
affecting that economic sector. Banking Companies are engaged in
accepting deposits and making commercial and principally non-mortgage
consumer loans and include state chartered banks, savings and loan
institutions, and banks that are members of the Federal Reserve
System. The prices of the securities of Banking Companies may
fluctuate widely due to the broadening of regional and national
interstate banking powers, the reduction in the number of
publicly-traded banks, and general economic conditions which could
create exposure to credit losses, and are dependent to a greater or
lesser extent on changes in the interest rate.

18
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

As of September 1, 1998, the Banking Fund had not commenced operations, and does
not have a performance history.

FEES AND EXPENSES OF THE FUND+

This table describes the fees and expenses that you may pay if you buy and hold Shares of the BANKING FUND
- -------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.85%
Distribution (12b-1) Fees None
Other Expenses* 1.45%
-----
Total Annual Fund Operating Expenses** 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* OTHER EXPENSES ARE ESTIMATED.

**TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.30%.

EXAMPLE

THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE
BANKING FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS
<S> <C>
$233 $718
</TABLE>

19
<PAGE>

FUND INFORMATION - BASIC MATERIALS FUND

FUND OBJECTIVE

The BASIC MATERIALS FUND seeks capital appreciation by investing in companies
engaged in the mining, manufacture, or sale of basic materials, such as lumber,
steel, iron, aluminum, concrete, chemicals and other basic building and
manufacturing materials ("Basic Materials Companies").

PORTFOLIO INVESTMENTS

The Fund invests substantially all of its assets in a portfolio of equity
securities of Basic Materials Companies that are traded in the United States.
The Fund may also invest in futures and options transactions, purchase ADRs and
U.S. Government securities, and enter into repurchase agreements.

RISK CONSIDERATIONS

The Basic Materials Fund is subject to a number of risks that will affect the
value of its shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the same economic sector (e.g., basic materials) that the Fund
purchases will underperform the market as a whole. To the extent that
the Fund's investments are concentrated in issuers conducting business
in the same economic sector, the Fund is subject to legislative or
regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. Basic Materials Companies
are engaged in the manufacture, mining, processing, or distribution of
raw materials and intermediate goods used in the industrial sector,
and may be involved in the production of metals, textiles, and wood
products, including equipment suppliers and railroads. The prices of
the securities of Basic Materials Companies may fluctuate widely due
to the level and volatility of commodity prices, the exchange value of
the dollar, import controls, worldwide competition, liability for
environmental damage, depletion of resources, and mandated
expenditures for safety and pollution control devices.

20
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

As of September 1, 1998, the Basic Materials Fund had not commenced operations,
and does not have a performance history.

FEES AND EXPENSES OF THE FUND+

This table describes the fees and expenses that you may pay if you buy and hold Shares of the BASIC MATERIALS FUND
- ------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.85%
Distribution (12b-1) Fees None
Other Expenses* 1.45%
-----
Total Annual Fund Operating Expenses** 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* OTHER EXPENSES ARE ESTIMATED.

**TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30%. IN THE
EVENT THAT SUCH EXPENSES INCREASE DURING THE YEAR, THE ADVISOR AND THE
SERVICER WILL WAIVE FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO
NOT EXCEED 2.30%.

EXAMPLE

THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE BASIC
MATERIALS FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
<S> <C>
$233 $718
</TABLE>

21
<PAGE>

FUND INFORMATION - BIOTECHNOLOGY FUND

FUND OBJECTIVE

The BIOTECHNOLOGY FUND seeks capital appreciation by investing in companies that
are involved in the biotechnology industry, including companies involved in
research and development, genetic or other biological engineering, and in the
design, manufacture, or sale of related biotechnology products or services
("Biotechnology Companies").

PORTFOLIO INVESTMENTS

RISK CONSIDERATIONS

The Biotechnology Fund is subject to a number of risks that will affect the
value of its shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the same economic sector (e.g., biotechnology) that the Fund purchases
will underperform the market as a whole. To the extent that the
Fund's investments are concentrated in issuers conducting business in
the same economic sector, the Fund is subject to legislative or
regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. Biotechnology Companies
are engaged in the research, development, and manufacture of various
biotechnological products, services, and processes; manufacture and/or
distribute biotechnological and biomedical products, including devices
and instruments; provide or benefit significantly from scientific and
technological advances in biotechnology; or provide processes or
services instead of, or in addition to, products. The prices of the
securities of Biotechnology Companies may fluctuate widely due to
patent considerations, intense competition, rapid technological change
and obsolescence, and regulatory requirements of the Food and Drug
Administration, the Environmental Protection Agency, state and local
governments, and foreign regulatory authorities.

- SMALL ISSUER RISK - Many Biotechnology Companies are relatively small
and have thinly traded equity securities, may not yet offer products
or offer a single product, and may have persistent losses during a new
product's transition from development to production or erratic revenue
patterns.

22
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

As of September 1, 1998, the Biotechnology Fund had not commenced operations,
and does not have a performance history.

FEES AND EXPENSES OF THE FUND+

This table describes the fees and expenses that you may pay if you buy and hold Shares of the
BIOTECHNOLOGY FUND
- -------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.85%
Distribution (12b-1) Fees None
Other Expenses* 1.45%
-----
Total Annual Fund Operating Expenses** 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* OTHER EXPENSES ARE ESTIMATED.

**TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.30%.

EXAMPLE

THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE
BIOTECHNOLOGY FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS
<S> <C>
$233 $718
</TABLE>

23
<PAGE>

FUND INFORMATION - CONSUMER PRODUCTS FUND

FUND OBJECTIVE

The CONSUMER PRODUCTS FUND seeks capital appreciation by investing in companies
engaged in manufacturing finished goods and services both domestically and
internationally ("Consumer Products Companies").

PORTFOLIO INVESTMENTS

The Fund invests substantially all of its assets in a portfolio of equity
securities of Consumer Products Companies that are traded in the United States.
The Fund may also invest in futures and options transactions, purchase ADRs and
U.S. Government securities, and enter into repurchase agreements.

RISK CONSIDERATIONS

The Consumer Products Fund is subject to a number of risks that will affect the
value of its shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the same economic sector (E.G., consumer products) that the Fund
purchases will underperform the market as a whole. To the extent that
the Fund's investments are concentrated in issuers conducting business
in the same economic sector, the Fund is subject to legislative or
regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. Consumer Products
Companies include companies that manufacture, wholesale or retail
durable goods such as major appliances and personal computers, or that
retail non-durable goods such as beverages, tobacco, health care
products, household and personal care products, apparel, and
entertainment products (E.G., books, magazines, TV, cable, movies,
music, gaming, sports), as well as companies that provide consumer
products and services such as lodging, child care, convenience stores,
and car rentals. The performance of Consumer Products Companies has
historically been closely tied to the performance of the overall
economy, and is also affected by interest rates, competition, consumer
confidence and relative levels of disposable household income and
seasonal consumer spending. Changes in demographics and consumer
tastes can also affect the demand for, and success of, consumer
products in the marketplace.

24
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

As of September 1, 1998, the Consumer Products Fund had not commenced
operations, and does not have a performance history.

FEES AND EXPENSES OF THE FUND+

This table describes the fees and expenses that you may pay if you buy and hold Shares of the
CONSUMER PRODUCTS FUND
- -----------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.85%
Distribution (12b-1) Fees None
Other Expenses* 1.45%
-----
Total Annual Fund Operating Expenses** 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* OTHER EXPENSES ARE ESTIMATED.

**TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.30%.

EXAMPLE

THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE
CONSUMER PRODUCTS FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS
<S> <C>
$233 $718
</TABLE>

25
<PAGE>

FUND INFORMATION - ELECTRONICS FUND

FUND OBJECTIVE

The ELECTRONICS FUND seeks capital appreciation by investing in companies that
are involved in the electronics sector, including semiconductor manufacturers
and distributors, and makers and vendors of other electronic components and
devices ("Electronics Companies").

PORTFOLIO INVESTMENTS

The Fund invests substantially all of its assets in a portfolio of equity
securities of Electronics Companies that are traded in the United States. The
Fund may also invest in futures and options transactions, purchase ADRs and U.S.
Government securities, and enter into repurchase agreements.

RISK CONSIDERATIONS

The Electronics Fund is subject to a number of risks that will affect the value
of its shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the same economic sector (e.g., electronics) that the Fund purchases
will underperform the market as a whole. To the extent that the
Fund's investments are concentrated in issuers conducting business in
the same economic sector, the Fund is subject to legislative or
regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. Electronics Companies
include companies involved in the manufacture and development of
semiconductors, connectors, printed circuit boards and other
components; equipment vendors to electronic component manufacturers;
electronic component distributors; electronic instruments and
electronic systems vendors; and also include companies involved in all
aspects of the electronics business and in new technologies or
specialty areas such as defense electronics, advanced design and
manufacturing technologies, or lasers. The prices of the securities
of Electronics Companies may fluctuate widely due to risks of rapid
obsolescence of products, intense competition, the economic
performance of their customers, high technology and research costs
(especially in light of decreased defense spending by the U.S.
Government), and may face competition from subsidized foreign
competitors with lower production costs.

26
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

As of September 1, 1998, the Electronics Fund had not commenced operations, and
does not have a performance history.

FEES AND EXPENSES OF THE FUND+

This table describes the fees and expenses that you may pay if you buy and hold Shares of the
ELECTRONICS FUND
- -------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.85%
Distribution (12b-1) Fees None
Other Expenses* 1.45%
-----
Total Annual Fund Operating Expenses** 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* OTHER EXPENSES ARE ESTIMATED.

**TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.30%.

EXAMPLE

THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE
ELECTRONICS FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS
<S> <C>
$233 $718
</TABLE>

27
<PAGE>

FUND INFORMATION - ENERGY FUND

FUND OBJECTIVE

The ENERGY FUND seeks capital appreciation by investing in companies involved in
the energy field, including the exploration, production, and development of oil,
gas, coal and alternative sources of energy ("Energy Companies").

PORTFOLIO INVESTMENTS

The Fund invests substantially all of its assets in a portfolio of equity
securities of Energy Companies that are traded in the United States. The Fund
may also invest in futures and options transactions, purchase ADRs and U.S.
Government securities, and enter into repurchase agreements.

RISK CONSIDERATIONS

The Energy Fund is subject to a number of risks that will affect the value of
its shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the same economic sector (e.g., energy) that the Fund purchases will
underperform the market as a whole. To the extent that the Fund's
investments are concentrated in issuers conducting business in the
same economic sector, the Fund is subject to legislative or regulatory
changes, adverse market conditions and/or increased competition
affecting that economic sector. Energy Companies are involved in all
aspects of the energy industry, including the conventional areas of
oil, gas, electricity, and coal, and alternative sources of energy
such as nuclear, geothermal, oil shale, and solar power, and include
companies that produce, transmit, market, distribute or measure
energy; companies involved in providing products and services to
companies in the energy field; and companies involved in the
exploration of new sources of energy, conservation, and energy-related
pollution control. The prices of the securities of Energy Companies
may fluctuate widely due to changes in value and dividend yield, which
depend largely on the price and supply of energy fuels, events
relating to international politics, energy conservation, the success
of exploration projects, and tax and other governmental regulatory
policies.

28
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

As of September 1, 1998, the Energy Fund had not commenced operations, and does
not have a performance history.

FEES AND EXPENSES OF THE FUND+

This table describes the fees and expenses that you may pay if you buy and hold Shares of the ENERGY FUND
- -------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.85%
Distribution (12b-1) Fees None
Other Expenses* 1.45%
-----
Total Annual Fund Operating Expenses** 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* OTHER EXPENSES ARE ESTIMATED.

**TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.30%.

EXAMPLE

THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE ENERGY
FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS
<S> <C>
$233 $718
</TABLE>

29
<PAGE>

FUND INFORMATION - ENERGY SERVICES FUND

FUND OBJECTIVE

The ENERGY SERVICES FUND seeks capital appreciation by investing in companies
that are involved in the energy services field, including those that provide
services and equipment in the areas of oil, coal, and gas exploration and
production ("Energy Services Companies").

PORTFOLIO INVESTMENTS

The Fund invests substantially all of its assets in a portfolio of equity
securities of Energy Services Companies that are traded in the United States.
The Fund may also invest in futures and options transactions, purchase ADRs and
U.S. Government securities, and enter into repurchase agreements.

RISK CONSIDERATIONS

The Energy Services Fund is subject to a number of risks that will affect the
value of its shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the same economic sector (e.g., energy services) that the Fund
purchases will underperform the market as a whole. To the extent that
the Fund's investments are concentrated in issuers conducting business
in the same economic sector, the Fund is subject to legislative or
regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. Energy Services Companies
are engaged in one or more businesses in the energy service field,
including those that provide services and equipment to companies
engaged in the production, refinement or distribution of oil, gas,
electricity, and coal; companies involved with the production and
development of newer sources of energy such as nuclear, geothermal,
oil shale, and solar power; companies involved with onshore or
offshore drilling; companies involved in production and well
maintenance; companies involved in exploration engineering, data and
technology; companies involved in energy transport; and companies
involved in equipment and plant design or construction. The prices of
the securities of Energy Services Companies may fluctuate widely due
to the supply and demand both for their specific products or services
and for energy products in general, the price of oil and gas,
exploration and production spending, governmental regulation and
environmental issues, and world events and economic conditions
generally affecting energy supply companies.

30
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

As of September 1, 1998, the Energy Services Fund had not commenced operations,
and does not have a performance history.

FEES AND EXPENSES OF THE FUND+

This table describes the fees and expenses that you may pay if you buy and hold Shares of the ENERGY SERVICES FUND
- -----------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.85%
Distribution (12b-1) Fees None
Other Expenses* 1.45%
-----
Total Annual Fund Operating Expenses** 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* OTHER EXPENSES ARE ESTIMATED.

**TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.30%.

EXAMPLE

THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE ENERGY
SERVICES FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS
<S> <C>
$233 $718
</TABLE>

31
<PAGE>

FUND INFORMATION - FINANCIAL SERVICES FUND

FUND OBJECTIVE

The FINANCIAL SERVICES FUND seeks capital appreciation by investing in companies
that are involved in the financial services sector, including commercial banks,
savings and loan associations, insurance companies, brokerage companies, and
real estate and leasing companies ("Financial Services Companies").

PORTFOLIO INVESTMENTS

The Fund invests substantially all of its assets in a portfolio of equity
securities of Financial Services Companies that are traded in the United States.
The Fund may also invest in futures and options transactions, purchase ADRs and
U.S. Government securities, and enter into repurchase agreements. Under SEC
regulations, the Fund may not invest more than 5% of its total assets in the
equity securities of any company that derives more than 15% of its revenues from
brokerage or investment management activities.

RISK CONSIDERATIONS

The Financial Services Fund is subject to a number of risks that will affect the
value of its shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the same economic sector (e.g., financial services) that the Fund
purchases will underperform the market as a whole. To the extent that
the Fund's investments are concentrated in issuers conducting business
in the same economic sector, the Fund is subject to legislative or
regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. Financial Services
Companies are subject to extensive governmental regulation, which may
limit both the amounts and types of loans and other financial
commitments they can make, and the rates and fees they can charge.
Profitability is largely dependent on the availability and cost of
capital, and can fluctuate significantly when interest rates change.
Credit losses resulting from financial difficulties of borrowers also
can negatively impact the sector.

32
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

As of September 1, 1998, the Financial Services Fund had not commenced
operations, and does not have a performance history.

FEES AND EXPENSES OF THE FUND+

This table describes the fees and expenses that you may pay if you buy and hold Shares of the
FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.85%
Distribution (12b-1) Fees None
Other Expenses* 1.45%
-----
Total Annual Fund Operating Expenses** 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* OTHER EXPENSES ARE ESTIMATED.

**TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.30%.

EXAMPLE

THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE
FINANCIAL SERVICES FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS
<S> <C>
$233 $718
</TABLE>

33
<PAGE>

FUND INFORMATION - HEALTH CARE FUND

FUND OBJECTIVE

The HEALTH CARE FUND seeks capital appreciation by investing in companies that
are involved in the health care industry ("Health Care Companies").

PORTFOLIO INVESTMENTS

The Fund invests substantially all of its assets in a portfolio of equity
securities of Health Care Companies that are traded in the United States. The
Fund may also invest in futures and options transactions, purchase ADRs and U.S.
Government securities, and enter into repurchase agreements.

RISK CONSIDERATIONS

The Health Care Fund is subject to a number of risks that will affect the value
of its shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the same economic sector (e.g., heath care) that the Fund purchases
will underperform the market as a whole. To the extent that the
Fund's investments are concentrated in issuers conducting business in
the same economic sector, the Fund is subject to legislative or
regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. Health Care Companies
include pharmaceutical companies, companies involved in research and
development of pharmaceutical products and services, companies
involved in the operation of health care facilities, and other
companies involved in the design, manufacture, or sale of health
care-related products or services. The prices of the securities of
Health Care Companies may fluctuate widely due to government
regulation and approval of their products and services, which can have
a significant effect on their price and availability. Furthermore,
the types of products or services produced or provided by these
companies may quickly become obsolete. Moreover, liability for
products that are later alleged to be harmful or unsafe may be
substantial, and may have a significant impact on a Health Care
Company's market value and/or share price.

34
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

As of September 1, 1998, the Health Care Fund had not commenced operations, and
does not have a performance history.

FEES AND EXPENSES OF THE FUND+

This table describes the fees and expenses that you may pay if you buy and hold Shares of the HEALTH CARE FUND
- -------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.85%
Distribution (12b-1) Fees None
Other Expenses* 1.45%
-----
Total Annual Fund Operating Expenses** 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* OTHER EXPENSES ARE ESTIMATED.

**TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.30%.

EXAMPLE

THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE HEALTH
CARE FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS
<S> <C>
$233 $718
</TABLE>

35
<PAGE>

FUND INFORMATION - LEISURE FUND

FUND OBJECTIVE

The LEISURE FUND seeks capital appreciation by investing in companies engaged in
leisure and entertainment businesses, including hotels and resorts, casinos,
radio and television broadcasting and advertising, motion picture production,
toys and sporting goods manufacture, musical recordings and instruments, alcohol
and tobacco, and publishing ("Leisure Companies").

PORTFOLIO INVESTMENTS

The Fund invests substantially all of its assets in a portfolio of equity
securities of Leisure Companies that are traded in the United States. The Fund
may also invest in futures and options transactions, purchase ADRs and U.S.
Government securities, and enter into repurchase agreements.

RISK CONSIDERATIONS

The Leisure Fund is subject to a number of risks that will affect the value of
its shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the same economic sector (e.g., leisure) that the Fund purchases will
underperform the market as a whole. To the extent that the Fund's
investments are concentrated in issuers conducting business in the
same economic sector, the Fund is subject to legislative or regulatory
changes, adverse market conditions and/or increased competition
affecting that economic sector. Leisure Companies are engaged in the
design, production, or distribution of goods or services in the
leisure industries. Securities of Leisure Companies may be considered
speculative, and generally exhibit greater volatility than the overall
market. The prices of the securities of Leisure Companies may
fluctuate widely due to unpredictable earnings, due in part to
changing consumer tastes and intense competition, strong reaction to
technological developments and to the threat of increased government
regulation, particularly in the gaming arena.

36
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

As of September 1, 1998, the Leisure Fund had not commenced operations, and does
not have a performance history.

FEES AND EXPENSES OF THE FUND+

This table describes the fees and expenses that you may pay if you buy and hold Shares of the LEISURE FUND
- -------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.85%
Distribution (12b-1) Fees None
Other Expenses* 1.45%
-----
Total Annual Fund Operating Expenses** 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* OTHER EXPENSES ARE ESTIMATED.

**TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.30%.

EXAMPLE

THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE
LEISURE FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS
<S> <C>
$233 $718
</TABLE>

37
<PAGE>

FUND INFORMATION - RETAILING FUND

FUND OBJECTIVE

The RETAILING FUND seeks capital appreciation by investing in companies engaged
in merchandising finished goods and services, including department stores,
restaurant franchises, mail order operations and other companies involved in
selling products to consumers ("Retailing Companies").

PORTFOLIO INVESTMENTS

The Fund invests substantially all of its assets in a portfolio of equity
securities of Retailing Companies that are traded in the United States. The
Fund may also invest in futures and options transactions, purchase ADRs and U.S.
Government securities, and enter into repurchase agreements.

RISK CONSIDERATIONS

The Retailing Fund is subject to a number of risks that will affect the value of
its shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the same economic sector (e.g., retailing) that the Fund purchases
will underperform the market as a whole. To the extent that the
Fund's investments are concentrated in issuers conducting business in
the same economic sector, the Fund is subject to legislative or
regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. Retailing Companies
include drug and department stores; suppliers of goods and services
for homes, home improvements and yards; clothing, jewelry, electronics
and computer retailers; franchise restaurants; motor vehicle and
marine dealers; warehouse membership clubs; mail order operations; and
companies involved in alternative selling methods. The prices of the
securities of Retailing Companies may fluctuate widely due to consumer
spending, which is affected by general economic conditions and
consumer confidence levels. The retailing industry is highly
competitive, and a Retailing Company's success is often tied to its
ability to anticipate and react to changing consumer tastes. Many
Retailing Companies are thinly capitalized, and are dependent upon a
relatively few number of business days to achieve their overall
results.

38
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

As of September 1, 1998, the Retailing Fund had not commenced operations, and
does not have a performance history.

FEES AND EXPENSES OF THE FUND+

This table describes the fees and expenses that you may pay if you buy and hold Shares of the
RETAILING FUND
- ------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.85%
Distribution (12b-1) Fees None
Other Expenses* 1.45%
-----
Total Annual Fund Operating Expenses** 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* OTHER EXPENSES ARE ESTIMATED.

**TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT
IN THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL
WAIVE FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED
2.30%.

EXAMPLE

THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE
RETAILING FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS
<S> <C>
$233 $718
</TABLE>

39
<PAGE>

FUND INFORMATION - TECHNOLOGY FUND

FUND OBJECTIVE

The TECHNOLOGY FUND seeks capital appreciation by investing in companies that
are involved in the technology sector, including computer software and service
companies, semiconductor manufacturers, networking and telecommunications
equipment manufacturers, PC hardware and peripherals companies ("Technology
Companies")

PORTFOLIO INVESTMENTS

The Fund invests substantially all of its assets in a portfolio of equity
securities of Technology Companies that are traded in the United States. The
Fund may also invest in futures and options transactions, purchase ADRs and U.S.
Government securities, and enter into repurchase agreements.

RISK CONSIDERATIONS

The Technology Fund is subject to a number of risks that will affect the value
of its shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the same economic sector (e.g., technology) that the Fund purchases
will underperform the market as a whole. To the extent that the
Fund's investments are concentrated in issuers conducting business in
the same economic sector, the Fund is subject to legislative or
regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. Technology Companies are
companies which the Advisor believes have, or will develop, products,
processes, or services that will provide or will benefit significantly
from technological advances and improvements. These companies may
include, for example, companies that develop, produce or distribute
products or services in the computer, semiconductor, electronics,
communications, health care, and biotechnology sectors. The prices of
the securities of Technology Companies may fluctuate widely due to
competitive pressures, increased sensitivity to short product cycles
and aggressive pricing, problems relating to bringing their products
to market, very high price/earnings ratios, and high personnel
turnover due to severe labor shortages for skilled technology
professionals.

- SMALL ISSUER RISK - Many Technology Companies are relatively small and
have thinly traded securities, may offer only one or a limited number
of rapidly obsolescing products, and may have persistent losses during
a new product's transition from development to production.

40
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

As of September 1, 1998, the Technology Fund had not commenced operations, and
does not have a performance history.

FEES AND EXPENSES OF THE FUND+

This table describes the fees and expenses that you may pay if you buy and hold Shares of the
TECHNOLOGY FUND
- -----------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.85%
Distribution (12b-1) Fees None
Other Expenses* 1.45%
-----
Total Annual Fund Operating Expenses** 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* OTHER EXPENSES ARE ESTIMATED.

**TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.30%.

EXAMPLE

THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE
TECHNOLOGY FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS
<S> <C>
$233 $718
</TABLE>

41
<PAGE>

FUND INFORMATION - TELECOMMUNICATIONS FUND

FUND OBJECTIVE

The TELECOMMUNICATIONS FUND seeks capital appreciation by investing in companies
engaged in the development, manufacture, or sale of communications services or
communications equipment ("Telecommunications Companies").

PORTFOLIO INVESTMENTS

The Fund invests substantially all of its assets in a portfolio of equity
securities of Telecommunications Companies that are traded in the United States.
The Fund may also invest in futures and options transactions, purchase ADRs and
U.S. Government securities, and enter into repurchase agreements. Although many
established Telecommunications Companies pay an above-average dividend, the
Fund's investment decisions are primarily based on growth potential and not on
income.

RISK CONSIDERATIONS

The Telecommunications Fund is subject to a number of risks that will affect the
value of its shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the same economic sector (e.g., telecommunications) that the Fund
purchases will underperform the market as a whole. To the extent that
the Fund's investments are concentrated in issuers conducting business
in the same economic sector, the Fund is subject to legislative or
regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. Telecommunications
Companies range from traditional local and long-distance telephone
services or equipment providers, to companies involved in developing
technologies such as cellular telephone or paging services, Internet
equipment and service providers, and fiber-optics. The prices of the
securities of Telecommunications Companies may fluctuate widely due to
both federal and state regulations governing rates of return and
services that may be offered, fierce competition for market share, and
competitive challenges in the U.S. from foreign competitors engaged in
strategic joint ventures with U.S. companies, and in foreign markets
from both U.S. and foreign competitors. In addition, recent industry
consolidation trends may lead to increased regulation of
Telecommunications Companies in their primary markets.

42
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

As of September 1, 1998, the Telecommunications Fund had not commenced
operations, and does not have a performance history.

FEES AND EXPENSES OF THE FUND+

This table describes the fees and expenses that you may pay if you buy and hold Shares of the
TELECOMMUNICATIONS FUND
- --------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.85%
Distribution (12b-1) Fees None
Other Expenses* 1.45%
-----
Total Annual Fund Operating Expenses** 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* OTHER EXPENSES ARE ESTIMATED.

**TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.30%.

EXAMPLE

THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE
TELECOMMUNICATIONS FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS
<S> <C>
$233 $718
</TABLE>

43
<PAGE>

FUND INFORMATION - TRANSPORTATION FUND

FUND OBJECTIVE

The TRANSPORTATION FUND seeks capital appreciation by investing in companies
engaged in providing transportation services or companies engaged in the design,
manufacture, distribution, or sale of transportation equipment ("Transportation
Companies").

PORTFOLIO INVESTMENTS

The Fund invests substantially all of its assets in a portfolio of equity
securities of Transportation Companies that are traded in the United States.
The Fund may also invest in futures and options transactions, purchase ADRs and
U.S. Government securities, and enter into repurchase agreements.

RISK CONSIDERATIONS

The Transportation Fund is subject to a number of risks that will affect the
value of its shares, including:

- EQUITY RISK - The equity markets are volatile, and the value of the
Fund's securities and futures and options contracts may fluctuate
drastically from day-to-day.

- SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the same economic sector (e.g., transportation) that the Fund
purchases will underperform the market as a whole. To the extent that
the Fund's investments are concentrated in issuers conducting business
in the same economic sector, the Fund is subject to legislative or
regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. Transportation Companies
may include, for example, companies involved in the movement of
freight or people, such as airline, railroad, ship, truck and bus
companies; equipment manufacturers (including makers of trucks,
automobiles, planes, containers, railcars or other modes of
transportation and related products); parts suppliers; and companies
involved in leasing, maintenance, and transportation-related services.
The prices of the securities of Transportation Companies may fluctuate
widely due to their cyclical nature, occasional sharp price movements
which may result from changes in the economy, fuel prices, labor
agreements, and insurance costs, the recent trend of government
deregulation, and increased competition from foreign companies, many
of which are partially funded by foreign governments and which may be
less sensitive to short-term economic pressures.

44
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

As of September 1, 1998, the Transportation Fund had not commenced operations,
and does not have a performance history.

FEES AND EXPENSES OF THE FUND+

This table describes the fees and expenses that you may pay if you buy and hold Shares of the
TRANSPORTATION FUND
- -------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.85%
Distribution (12b-1) Fees None
Other Expenses* 1.45%
-----
Total Annual Fund Operating Expenses** 2.30%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

* OTHER EXPENSES ARE ESTIMATED.

**TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 2.30% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 2.30%.

EXAMPLE

THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE
TRANSPORTATION FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS
<S> <C>
$233 $718
</TABLE>

45
<PAGE>

FUND INFORMATION - U.S. GOVERNMENT MONEY MARKET FUND

FUND OBJECTIVE

The U.S. GOVERNMENT MONEY MARKET FUND seeks to provide security of principal,
high current income, and liquidity.

PORTFOLIO INVESTMENTS

The U.S. Government Money Market Fund invests primarily in money market
instruments issued or guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities, and enters into repurchase
agreements fully collateralized by U.S. Government securities.

RISK CONSIDERATIONS

The U.S. Government Money Market Fund is subject to the following risk that will
potentially affect the value of its shares:

- INTEREST RATE RISK - The Fund's securities are subject to Interest
Rate Risk, which is the potential for decline in the price of the
Fund's securities due to rising interest rates.

In addition, the U.S. Government Money Market Fund is governed by SEC rules
which impose certain liquidity, maturity and diversification requirements. All
securities purchased by the Fund must have remaining maturities of 397 days or
less. The Fund's assets are valued using the amortized cost method, which
enables the Fund to maintain a stable price of $1.00 per share. ALTHOUGH THE
FUND IS MANAGED TO MAINTAIN A STABLE PRICE PER SHARE OF $1.00, THERE IS NO
GUARANTEE THAT THE PRICE WILL BE CONSTANTLY MAINTAINED.

46
<PAGE>

FUND PERFORMANCE AND FEE INFORMATION

U.S. GOVERNMENT MONEY MARKET FUND PERFORMANCE

The table below shows how the U.S. Government Money Market Fund's returns for
certain periods compare to those of a broad-based securities market index. Of
course, the Fund's past performance does not necessarily indicate how the Fund
will perform in the future.

For periods prior to November 1998, when the Fund began its operations,
performance shown is for the U.S. Government Money Market Subaccount of The
Rydex Advisor Variable Annuity Account, the Fund's predecessor, and includes
insurance-related charges that have the effect of reducing returns. The Fund's
predecessor commenced operations on May 7, 1997.

AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDING DECEMBER 31, 1997)(1)

U.S. Gov't Money Market Fund 90-Day Treasury Composite(2)
<S> <C> <C>
Since commencement of operations 3.19% 5.18%
</TABLE>

(1) These figures assume the reinvestment of dividends and capital gains
distributions.

(2) The 90-Day Treasury Composite Index is an unmanaged index that is a widely
recognized indicator of general money market performance.

YIELD - TO OBTAIN THE FUND'S CURRENT YIELD , PLEASE CALL 1-800-783-5628.

FEES AND EXPENSES OF THE FUND+
This table describes the fees and expenses that you may pay if you buy and hold Shares of the U.S. GOVERNMENT MONEY MARKET FUND.
- ----------------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM NET ASSETS)
<S> <C>
Management Fees 0.50%
Distribution (12b-1) Fees None
Other Expenses 1.10%
-----
Total Annual Fund Operating Expenses* 1.60%
</TABLE>

+ THE EXPENSES SHOWN DO NOT INCLUDE INSURANCE CHARGES PAID BY VARIABLE LIFE AND
VARIABLE ANNUITY ACCOUNT INVESTORS.

*TOTAL ANNUAL FUND OPERATING EXPENSES ARE EXPECTED TO BE 1.60% OR LESS, BUT IN
THE EVENT THAT SUCH EXPENSES ARE HIGHER, THE ADVISOR AND THE SERVICER WILL WAIVE
FEES AND/OR REIMBURSE EXPENSES TO ENSURE THAT EXPENSES DO NOT EXCEED 1.60%.

EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE U.S.
GOVERNMENT MONEY MARKET FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$163 $505 $871 $1,900
</TABLE>

47
<PAGE>

MORE INFORMATION ABOUT RISK

As indicated below, the Funds are subject to a number of risks that may affect
the value of Fund shares.

EQUITY RISK (NOVA, URSA, OTC, ARKTOS, PRECIOUS METALS AND SECTOR FUNDS) - The
Funds may invest in public and privately issued equity securities, including
common and preferred stocks, warrants, and rights, as well as instruments that
attempt to track the price movement of equity indices. Investments in equity
securities and equity derivatives in general are subject to market risks that
may cause their prices to fluctuate over time. The value of securities
convertible into equity securities, such as warrants or convertible debt, is
also affected by prevailing interest rates, the credit quality of the issuer and
any call provision. Fluctuations in the value of equity securities in which the
Funds invest will cause the net asset value of the Funds to fluctuate. An
investment in the Funds may be more suitable for long-term investors who can
bear the risk of short-term principal fluctuations.

FIXED INCOME RISK (U.S. GOVERNMENT BOND AND JUNO FUNDS) - The market value of
fixed income investments will change in response to interest rate changes and
other factors. During periods of falling interest rates, the values of
outstanding fixed income securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline.
Moreover, while securities with longer maturities tend to produce higher yields,
the prices of longer maturity securities are also subject to greater market
fluctuations as a result of changes in interest rates.

TRACKING ERROR RISK (BENCHMARK FUNDS) - While the Funds do not expect returns
to deviate from their respective benchmarks by more than ten percent, factors
such as Fund expenses, imperfect correlation between the Funds' investments and
those of their benchmarks, rounding of share prices, changes to the benchmark,
regulatory policies, and leverage, may affect their ability to achieve perfect
correlation. The magnitude of any tracking error may be affected by a higher
portfolio turnover rate.

TRADING HALT RISK (NOVA, URSA, U.S. GOVERNMENT BOND AND JUNO FUNDS) - The
Funds typically will hold short-term options and futures contracts. The major
exchanges on which these contracts are traded, such as the Chicago Mercantile
Exchange ("CME"), have established limits on how much an option or futures
contract may decline over various time periods within a day. If an option or
futures contract's price declines more than the established limits, trading on
the exchange is halted on that instrument. If a trading halt occurs at the
close of a trading day, a Fund may not be able to purchase or sell options or
futures contracts. In such an event, a Fund also may be required to use a
"fair-value" method to price its outstanding contracts.

LEVERAGING RISK (NOVA, U.S. GOVERNMENT BOND AND SECTOR FUNDS) - Leveraging
activities include, among other things, borrowing and the use of short sales,
options and futures. There are risks associated with leveraging activities,
including:

- - A Fund experiencing losses over certain ranges in the market that exceed
losses experienced by a non-leveraged Fund.

48
<PAGE>

- - There may be an imperfect or no correlation between the changes in market
value of the securities held by a Fund and the prices of futures and
options on futures.
- - Although the Funds will only purchase exchange-traded futures and options,
due to market conditions there may not be a liquid secondary market for a
futures contract or option. As a result, the Funds may be unable to close
out their futures or options contracts at a time which is advantageous.
- - Trading restrictions or limitations may be imposed by an exchange, and
government regulations may restrict trading in futures contracts and
options.

In addition, the following leveraged instruments are subject to certain specific
risks:

FUTURES RISK - Futures contracts and options on futures contracts provide
for the future sale by one party and purchase by another party of a
specified amount of a specific security at a specified future time and at a
specified price. An option on a futures contract gives the purchaser the
right, in exchange for a premium, to assume a position in a futures
contract at a specified exercise price during the term of the option.
Index futures are futures contracts for various indices that are traded on
registered securities exchanges.

The Funds may use futures contracts and related options for bona fide
hedging purposes to offset changes in the value of securities held or
expected to be acquired. They may also be used to gain exposure to a
particular market or instrument, to create a synthetic money market
position, and for certain other tax-related purposes. The Fund will only
enter into futures contracts traded on a national futures exchange or board
of trade.

OPTIONS RISK - The buyer of an option acquires the right to buy (a call
option) or sell (a put option) a certain quantity of a security (the
underlying security) or instrument at a certain price up to a specified
point in time. The seller or writer of an option is obligated to sell (a
call option) or buy (a put option) the underlying security. When writing
(selling) call options on securities, the Funds may cover its position by
owning the underlying security on which the option is written or by owning
a call option on the underlying security. Alternatively, the Funds may
cover its position by maintaining in a segregated account cash or liquid
securities equal in value to the exercise price of the call option written
by the Funds.

Because option premiums paid or received by the Funds are small in relation
to the market value of the investments underlying the options, buying and
selling put and call options can be more speculative than investing
directly in securities.

SHORT SALES RISK - Short sales are transactions in which a Fund sells a
security it does not own. To complete the transaction, the Fund must
borrow the security to make delivery to the buyer. The Fund is then
obligated to replace the security borrowed by purchasing the security at
the market price at the time of replacement. The price at such time may be
more or less than the price at which the security was sold by the Fund.

PORTFOLIO TURNOVER RATE RISK (PRECIOUS METALS, OTC AND U.S. GOVERNMENT BOND
FUNDS) - The Trust anticipates that investors that are part of a tactical or
strategic asset-allocation strategy will frequently redeem or exchange shares of
a Fund, which will cause that

49
<PAGE>

Fund to experience high portfolio turnover. A higher portfolio turnover rate
may result in a Fund paying higher levels of transaction costs and generating
greater tax liabilities for shareholders.

CONCENTRATION RISK (PRECIOUS METALS FUND AND SECTOR FUNDS) - Since these Funds
invest in the securities of a limited number of issuers conducting business in a
specific industry, it is subject to the risk that those issuers (or that
industry) will perform poorly, and the Fund will be negatively impacted by that
poor performance. With respect to the Precious Metals Fund, the prices of
precious metals may fluctuate widely due to changes in inflation or inflation
expectations, currency fluctuations, speculation, worldwide demand and political
developments in precious metals-producing countries. None of the Benchmark
Funds will invest 25% or more of the value of the Fund's total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry; EXCEPT THAT, to the extent the benchmark selected for a
particular Benchmark Fund is concentrated in a particular industry, the Fund
will necessarily be concentrated in that industry. This limitation does not
apply to investments or obligations of the U.S. Government or any of its
agencies or instrumentalities.

EARLY CLOSING RISK (OTC AND ARKTOS FUNDS) - The normal close of trading of
securities listed on the National Association of Securities Dealers Automated
Quotations system ("NASDAQ") and the New York Stock Exchange ("NYSE") is
4:00 P.M., Eastern Time. Unanticipated early closings may result in a Fund
being unable to sell or buy securities on that day. If an exchange closes early
on a day when one or more of the Funds needs to execute a high volume of
securities trades late in a trading day, a Fund might incur substantial trading
losses.

YEAR 2000 RISK (ALL FUNDS) - The Funds depend on the smooth functioning of
computer systems in almost every aspect of their business. Like other mutual
funds, businesses and individuals around the world, the Funds could be adversely
affected if the computer systems used by its service providers do not properly
process dates on and after January 1, 2000 and distinguish between the year 2000
and the year 1900. The Trust has asked their service providers whether they
expect to have their computer systems adjusted for the year 2000 transition, and
received assurances from all that they are devoting significant resources to
prevent material adverse consequences to the Funds. The Funds and their
respective shareholders may experience losses if these assurances prove to be
incorrect or as a result of year 2000 computer difficulties experienced by
issuers of portfolio securities or third parties, such as custodians, banks,
broker-dealers or others with which the Funds do business.

FOREIGN COMPANY RISKS (PRECIOUS METALS FUND AND SECTOR FUNDS) - Investments in
securities of foreign companies can be more volatile than investments in U.S.
companies. Diplomatic, political, or economic developments could affect
investments in foreign countries. Foreign companies generally are not subject to
uniform accounting, auditing, and financial reporting standards comparable to
those applicable to U.S. domestic companies.

50
<PAGE>

PURCHASING AND REDEEMING SHARES

Shares are offered continuously, and may be purchased on any day that the NYSE
is open for business (a "Business Day"). On any day that the New York Fed or
the NYSE closes early, the principal government securities and corporate bond
markets close early (such as on days in advance of holidays generally observed
by participants in these markets), or as permitted by the Securities and
Exchange Commission ("SEC"), the right is reserved to advance the time on that
day by which purchase and redemption orders must be received.

Shares of each Fund can be purchased only by insurance companies for their
separate accounts to fund variable life insurance and variable annuity contracts
and by trustees under certain pension, profit-sharing and other retirement
plans. An insurance company purchases and redeems Shares of each Fund based on,
among other things, the amount of net Contract premiums or purchase payments
allocated to a separate account investment division, transfers to or from a
separate account investment division, contract loans and repayments, contract
withdrawals and surrenders, and benefit payments, at the Fund's net asset value
per share calculated as of that same day.

All redemption requests will be processed and payment with respect thereto will
be made within seven days after tender. The Trust may suspend redemption, if
permitted by the 1940 Act, for any period during which the NYSE, NASDAQ, the
Chicago Mercantile Exchange ("CME"), the Chicago Board Options Exchange ("CBOE")
or the CBOT, as appropriate, is closed or during which trading is restricted by
the SEC or the SEC declares that an emergency exists. Redemptions may also be
suspended during other periods permitted by the SEC for the protection of the
Trust's investors.

NET ASSET VALUE.

The price per share (the offering price) will be the net asset value per share
("NAV") next determined after your purchase order is received by the Trust. NAV
is calculated by (1) taking the current market value of a Fund's total assets,
(2) subtracting the liabilities, and (3) dividing that amount by the total
number of shares owned by shareholders. For most Funds, the NAV is calculated
once each Business Day after the close of the NYSE (currently, 4:00 p.m.,
Eastern Time) and the settlement time for the Funds' futures and options
contracts, if any (typically, 4:15 p.m., Eastern Time). The NAV of the U.S.
Government Bond Fund and the Juno Fund is determined each day on which the CBOT
is open for trading futures contracts on U.S. Treasury bonds as of the close of
normal trading on the CBOT (normally 3:00 P.M., Eastern Time). If the exchange
or market where a Fund's securities or other investments are primarily traded
closes early, the NAV may be calculated earlier in accordance with the policies
set forth in the Funds' SAI.

TO RECEIVE THE CURRENT BUSINESS DAY'S NAV, THE TRUST MUST RECEIVE PURCHASE OR
REDEMPTION ORDERS BEFORE 3:45 P.M., EASTERN TIME, FOR THE NOVA, URSA, OTC AND
ARKTOS FUNDS, 3:30 P.M., EASTERN TIME, FOR THE PRECIOUS METALS AND THE SECTOR
FUNDS, 2:45 P.M., EASTERN TIME, FOR THE U.S. GOVERNMENT BOND AND JUNO FUNDS, AND
1:00 P.M., EASTERN TIME, FOR THE MONEY MARKET FUND. HOWEVER, YOUR INSURANCE
COMPANY OR RETIREMENT PLAN SPONSOR MAY HAVE EARLIER CUTOFF TIMES. VARIABLE LIFE
AND VARIABLE ANNUITY ACCOUNT INVESTORS SHOULD CONSULT THEIR SEPARATE ACCOUNT
PROSPECTUS.

51
<PAGE>

MANAGEMENT

THE ADVISOR'S INVESTMENT METHODOLOGY - BENCHMARK FUNDS

In managing the Benchmark Funds, the Advisor's primary objective is to match the
performance of each Fund's benchmark as closely as possible. Through the use of
quantitative analysis techniques, each Benchmark Fund is structured to match the
risk and return characteristics of the appropriate benchmark, while remaining
fully invested in all market environments. The Advisor monitors each Benchmark
Fund on an ongoing basis, and makes adjustments, as necessary, to minimize
tracking error and to maximize liquidity. The Advisor may utilize options
contracts to leverage a Benchmark Fund's investment exposure. In addition, some
Benchmark Funds may require short selling techniques designed to inversely
correlate to the performance of an index or benchmark.

THE ADVISOR'S INVESTMENT METHODOLOGY - SECTOR FUNDS

In managing the Sector Funds, the Advisor's investment team employs a
quantitative model that considers a number of factors. To develop a liquid
portfolio of stocks that adequately represent a particular market sector, the
Advisor applies filters to the broad universe of stocks of issuers that are
"principally engaged" in business activities in each industry sector.
Specifically, the Advisor's investment process screens stocks primarily based on
liquidity, market capitalization, and correlation relative to the entire
industry sector. The Advisor also may consider other factors.

The Advisor monitors the Sector Funds' portfolios on an ongoing basis, and adds
or deletes stocks from the portfolios as needed.

After constructing a portfolio for each Sector Fund, the Advisor may utilize
futures contracts and options to leverage a Fund's exposure to the relevant
business sector. The use of leverage will result in each Sector Fund being
exposed to its relevant business sector with more than 100% of its total assets.

Each business sector typically consists of numerous industries. For purposes of
the Advisor's investment methodology and the policies for each Sector Fund, a
company is considered to be "principally engaged" in a designated business
activity in a particular economic sector if at least 50% of its assets, gross
income, or net profits are committed to, or derived from, that activity. If a
question exists as to whether a company meets these standards, the Advisor will
determine whether the company's primary business is within the business sector
designated for investment by that Sector Fund.

52
<PAGE>

MANAGEMENT OF THE FUNDS

THE INVESTMENT ADVISOR

PADCO Advisors II, Inc., a Maryland corporation with offices at 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852, serves as investment advisor
and manager of the Funds. Albert P. Viragh, Jr., the Chairman of the Board and
the President of the Advisor, owns a controlling interest in the Advisor. From
1985 until the incorporation of the Advisor, Mr. Viragh was a Vice President of
Money Management Associates ("MMA"), a Maryland-based registered investment
advisor. From 1992 to June 1993, Mr. Viragh was the portfolio manager of The
Rushmore Nova Portfolio, a series of The Rushmore Fund, Inc., an investment
company managed by MMA.

The Advisor makes investment decisions for the assets of the Funds and
continuously reviews, supervises, and administers each Fund's investment
program. The Trustees of the Trust supervise the Advisor and establish
policies that the Advisor must follow in its day-to-day management
activities. Under an investment advisory agreement between the Trust and the
Advisor, the Funds pay the Advisor a fee at an annualized rate, based on the
average daily net assets for each Fund, as set forth below:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FUND ADVISORY FEE
- --------------------------------------------------------------------------------
<S> <C>
Nova .75%
- --------------------------------------------------------------------------------
Ursa .90%
- --------------------------------------------------------------------------------
OTC .75%
- --------------------------------------------------------------------------------
Arktos .90%
- --------------------------------------------------------------------------------
Precious Metals .75%
- --------------------------------------------------------------------------------
U.S. Government Bond .50%
- --------------------------------------------------------------------------------
Juno .90%
- --------------------------------------------------------------------------------
U.S. Government Money Market .50%
- --------------------------------------------------------------------------------
Sector Funds .85%
- --------------------------------------------------------------------------------
</TABLE>

The Advisor bears all of its own costs associated with providing these advisory
services and the expenses of the Trustees who are affiliated with the Advisor.
The Advisor may make payments from its own resources to broker-dealers and other
financial institutions in connection with the sale of Fund shares.

53
<PAGE>

PORTFOLIO MANAGEMENT - BENCHMARK FUNDS:

The portfolio manager of the Ursa Fund, OTC Fund and Arktos Fund is Michael P.
Byrum, who is a Vice President and the Advisor's senior portfolio manager.
Prior to joining the Advisor as a portfolio manager in July 1993, Mr. Byrum
worked as an investor representative with MMA.

The portfolio manager of the Nova Fund and the Juno Fund is Thomas Michael, who
joined the Advisor as a portfolio manager in March 1994. From 1992 to February
1994, Mr. Michael was a financial markets analyst at Cedar Street Investment
Management Co., of Chicago, Illinois, an institutional consulting firm
specializing in developing hedging and speculative strategies in stock index
futures contracts and U.S. Treasury bond futures contracts.

The portfolio manager of the Precious Metals Fund is T. Daniel Gillespie, who
joined the Advisor as a portfolio manager in January 1997. From July 1994 to
January 1997, Mr. Gillespie was a portfolio manager for GIT Investment Funds, a
registered investment company in Arlington, Virginia, where Mr. Gillespie
managed over $160 million in equity, bond, and money market mutual fund assets.
From 1991 to 1994, Mr. Gillespie worked as a portfolio manager to The Rushmore
Fund, Inc., where Mr. Gillespie managed over $900 million in mutual fund assets.

The portfolio manager of the U.S. Government Bond Fund is Anne H. Ruff, who
joined the Advisor as a portfolio manager in August 1996. From 1989 to 1995,
Ms. Ruff worked as a portfolio manager for United Services Life Insurance
Company in Arlington, Virginia, where Ms. Ruff managed $2.5 billion in
fixed-income portfolios.

PORTFOLIO MANAGEMENT - SECTOR FUNDS:

Each Sector Fund is managed by a team and no one person is responsible for
making investment decisions.

54
<PAGE>

DIVIDENDS AND DISTRIBUTIONS

Income dividends and capital gain distributions are paid at least annually by
each of the Funds, except the U.S. Government Money Market and the U.S.
Government Bond and Juno Funds, which declare dividends daily and pay them
monthly, to the insurance company. The Trust may declare a special capital
gains distribution if the Trustees believe that such a distribution would be in
the best interest of the shareholders of a Fund.

Each Fund is treated as a separate entity for federal tax purposes, and intends
to qualify for the special tax treatment afforded regulated investment
companies. As long as a Fund qualifies as a regulated investment company, it
pays no federal income tax on the earnings it distributes to Shareholders. A
Fund is not liable for any income or franchise tax in Delaware as long as it
qualifies as a regulated investment company for Federal income tax purposes.

55
<PAGE>

FINANCIAL HIGHLIGHTS

On _______________, 1998, the Trust acquired all of the assets and
liabilities (other than liabilities relating to insurance charges) of the
Rydex Advisor Variable Annuity Account (the "Separate Account") and the
subaccounts of the Separate Account (the "Subaccounts"). The information
prior to that date relates to the Subaccounts. The financial statements of
the Subaccounts were audited by PricewaterhouseCoopers as indicated in their
report dated March 6, 1998 on the Subaccounts' financial statements as of
December 31, 1997. This table should be read in conjunction with the
Subaccounts' financial statements and notes thereto which are incorporated by
reference to the Trust's Statement of Additional Information under "Financial
Information." Additional performance is contained in the Separate Account's
1998 Semi-Annual Report and is available upon request and without charge by
calling 1-888-667-4936.

56
<PAGE>

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

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOVA NOVA URSA URSA
SUBACCOUNT SUBACCOUNT* SUBACCOUNT SUBACCOUNT*
SIX MONTHS ENDED PERIOD ENDED SIX MONTHS ENDED JUNE 10, 1997 TO
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
(unaudited) (unaudited)
PER ACCUMULATION UNIT INCOME
PERFORMANCE:
ACCUMULATION UNIT VALUE--BEGINNING OF
PERIOD $ 12.21 $ 10.00 $ 8.07 $ 9.36
---------------- ----------------- ---------------- -----------------
Investment Income .25 .29 .17 .12
Expenses .24 .22 .14 .13
---------------- ----------------- ---------------- -----------------
Net Investment Income (Loss) .01 .07 .03 (.01)
Net Realized and Unrealized Gains
(Losses) on Securities 2.35 2.14 (1.15) (1.28)
---------------- ----------------- ---------------- -----------------
Net Increase (Decrease) in
Accumulation Unit Value 2.36 2.21 (1.12) (1.29)
---------------- ----------------- ---------------- -----------------
ACCUMULATION UNIT VALUE--END OF PERIOD $ 14.57 $ 12.21 $ 6.95 $ 8.07
---------------- ----------------- ---------------- -----------------
---------------- ----------------- ---------------- -----------------
RATIOS TO AVERAGE NET ASSETS**
Gross Expenses 4.11% 9.09% 4.27% 9.21%
Net Expenses 3.59% 2.80% 3.70% 2.90%
Net Investment Income (Loss) 0.14% 0.91% 0.85% (0.27)%
SUPPLEMENTARY DATA:
Portfolio Turnover Rate*** 0% 178.34% 0% 0%
Net Assets, End of Period (000's
omitted) $ 22,135 $ 10,448 $ 3,218 $ 2,879
Number of Accumulation Units
Outstanding at End of Period 1,518,888 855,862 463,004 356,784

<CAPTION>
URSA URSA
SUBACCOUNT* SUBACCOUNT*
MAY 24, 1997 TO MAY 7, 1997 TO
JUNE 3, 1997 MAY 21, 1997
--------------- --------------
<S> <C> <C>

PER ACCUMULATION UNIT INCOME
PERFORMANCE:
ACCUMULATION UNIT VALUE--BEGINNING OF
PERIOD $ 9.57 $ 10.00
--------------- --------------
Investment Income .01 .01
Expenses .01 .05
--------------- --------------
Net Investment Income (Loss) .00 (.04)
Net Realized and Unrealized Gains
(Losses) on Securities .01 (.33)
--------------- --------------
Net Increase (Decrease) in
Accumulation Unit Value .01 (.37)
--------------- --------------
ACCUMULATION UNIT VALUE--END OF PERIOD $ 9.58 $ 9.63
--------------- --------------
--------------- --------------
RATIOS TO AVERAGE NET ASSETS**
Gross Expenses 85.10% 13.62%
Net Expenses 2.90% 2.90%
Net Investment Income (Loss) 2.76% (10.05)%
SUPPLEMENTARY DATA:
Portfolio Turnover Rate*** 0% 0%
Net Assets, End of Period (000's
omitted) $ -- $ --
Number of Accumulation Units
Outstanding at End of Period -- --
</TABLE>

* COMMENCEMENT OF OPERATIONS: NOVA SUBACCOUNT AND URSA SUBACCOUNT--MAY 7,
1997
DUE TO THE NATURE OF THE INVESTMENT ACTIVITY, CERTAIN SUBACCOUNTS MAY
EXPERIENCE PERIODS WITH ZERO NET ASSETS. FINANCIAL HIGHLIGHTS ARE
PRESENTED FOR PERIODS WITH NET ASSETS GREATER THAN ZERO ONLY. PER
ACCUMULATION UNIT AMOUNTS ARE CALCULATED USING AVERAGE OUTSTANDING
UNITS.
** ANNUALIZED
*** PORTFOLIO TURNOVER RATE IS CALCULATED WITHOUT REGARD TO SHORT-TERM
SECURITIES HAVING A MATURITY OF LESS THAN ONE YEAR.

57
<PAGE>

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

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY MONEY
MARKET MARKET OTC OTC
SUBACCOUNT SUBACCOUNT* SUBACCOUNT SUBACCOUNT*
SIX MONTHS ENDED PERIOD ENDED SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
(unaudited) (unaudited)
PER ACCUMULATION UNIT INCOME
PERFORMANCE:
ACCUMULATION UNIT VALUE--BEGINNING OF
PERIOD $ 10.32 $ 10.00 $ 10.65 $ 10.00
---------------- ----------------- ---------------- -----------------
Investment Income .29 .52 .03 .12
Expenses .16 .21 .22 .21
---------------- ----------------- ---------------- -----------------
Net Investment Income (Loss) .13 .31 (.19) (.09)
Net Realized and Unrealized Gains
(Losses) on Securities (.00) .01 3.90 .74
---------------- ----------------- ---------------- -----------------
Net Increase (Decrease) in
Accumulation Unit Value .13 .32 3.71 .65
---------------- ----------------- ---------------- -----------------
ACCUMULATION UNIT VALUE--END OF PERIOD $ 10.45 $ 10.32 $ 14.36 $ 10.65
---------------- ----------------- ---------------- -----------------
---------------- ----------------- ---------------- -----------------
RATIOS TO AVERAGE NET ASSETS**
Gross Expenses 3.86% 6.82% 3.97% 9.07%
Net Expenses 3.00% 2.20% 3.60% 2.80%
Net Investment Income (Loss) 2.56% 3.34% (3.02)% (1.22)%
SUPPLEMENTARY DATA:
Portfolio Turnover Rate*** 0% 0% 351.34% 449.91%
Net Assets, End of Period (000's
omitted) $ 14,688 $ 17,903 $ 27,762 $ 2,367
Number of Accumulation Units
Outstanding at End of Period 1,405,279 1,734,974 1,933,702 222,217

<CAPTION>
PRECIOUS PRECIOUS
METALS METALS
SUBACCOUNT SUBACCOUNT*
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------- -----------------
<S> <C> <C>
(unaudited)
PER ACCUMULATION UNIT INCOME
PERFORMANCE:
ACCUMULATION UNIT VALUE--BEGINNING OF
PERIOD $ 7.02 $ 10.00
---------------- -----------------
Investment Income .04 .03
Expenses .14 .14
---------------- -----------------
Net Investment Income (Loss) (.10) (.11)
Net Realized and Unrealized Gains
(Losses) on Securities (.31) (2.87)
---------------- -----------------
Net Increase (Decrease) in
Accumulation Unit Value (.41) (2.98)
---------------- -----------------
ACCUMULATION UNIT VALUE--END OF PERIOD $ 6.61 $ 7.02
---------------- -----------------
---------------- -----------------
RATIOS TO AVERAGE NET ASSETS**
Gross Expenses 4.22% 9.76%
Net Expenses 3.60% 2.80%
Net Investment Income (Loss) (2.70)% (2.19)%
SUPPLEMENTARY DATA:
Portfolio Turnover Rate*** 729.13% 913.83%
Net Assets, End of Period (000's
omitted) $ 67 $ 518
Number of Accumulation Units
Outstanding at End of Period 10,094 73,827
</TABLE>

* COMMENCEMENT OF OPERATIONS: MONEY MARKET SUBACCOUNT AND OTC
SUBACCOUNT--MAY 7, 1997; PRECIOUS METALS SUBACCOUNT--MAY 29, 1997;
DUE TO THE NATURE OF THE INVESTMENT ACTIVITY, CERTAIN SUBACCOUNTS MAY
EXPERIENCE PERIODS WITH ZERO NET ASSETS. FINANCIAL HIGHLIGHTS ARE
PRESENTED FOR PERIODS WITH NET ASSETS GREATER THAN ZERO ONLY. PER
ACCUMULATION UNIT AMOUNTS ARE CALCULATED USING AVERAGE OUTSTANDING
UNITS.
** ANNUALIZED
*** PORTFOLIO TURNOVER RATE IS CALCULATED WITHOUT REGARD TO SHORT-TERM
SECURITIES HAVING A MATURITY OF LESS THAN ONE YEAR.

58
<PAGE>

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

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

<TABLE>
<CAPTION>
U.S. U.S. U.S.
GOVERNMENT GOVERNMENT GOVERNMENT U.S. U.S.
BOND BOND BOND GOVERNMENT GOVERNMENT
SUBACCOUNT SUBACCOUNT* SUBACCOUNT* BOND BOND
SIX MONTHS AUGUST 18, 1997 JULY 29, 1997 SUBACCOUNT* SUBACCOUNT*
ENDED TO TO JUNE 24, 1997 TO MAY 29, 1997 TO
JUNE 30, 1998 DECEMBER 31, 1997 AUGUST 12, 1997 JULY 14, 1997 JUNE 5, 1997
------------- ----------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
(unaudited)
PER ACCUMULATION UNIT INCOME
PERFORMANCE:
ACCUMULATION UNIT VALUE--BEGINNING OF
PERIOD $ 11.82 $ 10.70 $ 10.92 $ 10.44 $ 10.00
------------- ----------------- --------------- ---------------- ---------------
Investment Income .31 .24 .03 .13 .01
Expenses .19 .09 .01 .03 .01
------------- ----------------- --------------- ---------------- ---------------
Net Investment Income (Loss) .12 .15 .02 .10 .00
Net Realized and Unrealized Gains
(Losses) on Securities .57 .97 (.38) .13 .15
------------- ----------------- --------------- ---------------- ---------------
Net Increase (Decrease) in
Accumulation Unit Value .69 1.12 (.36) .23 .15
------------- ----------------- --------------- ---------------- ---------------
ACCUMULATION UNIT VALUE--END OF PERIOD $ 12.51 $ 11.82 $ 10.56 $ 10.67 $ 10.15
------------- ----------------- --------------- ---------------- ---------------
------------- ----------------- --------------- ---------------- ---------------
RATIOS TO AVERAGE NET ASSETS**
Gross Expenses 3.76% 8.47% 49.63% 12.68% 5.43%
Net Expenses 3.20% 2.40% 2.40% 2.40% 2.40%
Net Investment Income (Loss) 2.01% 3.49% 3.80% 7.94% 1.86%
SUPPLEMENTARY DATA:
Portfolio Turnover Rate*** 1077.28% 760.78% 0% 0% 0%
Net Assets, End of Period (000's
omitted) $ 1,462 $ 892 $ -- $ -- $ --
Number of Accumulation Units
Outstanding at End of Period 116,899 75,493 -- -- --
</TABLE>

* COMMENCEMENT OF OPERATIONS: U. S. GOVERNMENT BOND SUBACCOUNT--MAY 29,
1997
DUE TO THE NATURE OF THE INVESTMENT ACTIVITY, CERTAIN SUBACCOUNTS MAY
EXPERIENCE PERIODS WITH ZERO NET ASSETS. FINANCIAL HIGHLIGHTS ARE
PRESENTED FOR PERIODS WITH NET ASSETS GREATER THAN ZERO ONLY. PER
ACCUMULATION UNIT AMOUNTS ARE CALCULATED USING AVERAGE OUTSTANDING
UNITS.
** ANNUALIZED
*** PORTFOLIO TURNOVER RATE IS CALCULATED WITHOUT REGARD TO SHORT-TERM
SECURITIES HAVING A MATURITY OF LESS THAN ONE YEAR.

59
<PAGE>

FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNO JUNO
SUBACCOUNT JUNO SUBACCOUNT JUNO
MARCH 4, 1998 TO SUBACCOUNT FEBRUARY 23, 1998 SUBACCOUNT
JUNE 30, 1998 MARCH 2, 1998 TO FEBRUARY 25, 1998 FEBRUARY 2, 1998
---------------- ------------- -------------------- ----------------
<S> <C> <C> <C> <C>
PER ACCUMULATION UNIT INCOME
PERFORMANCE:
ACCUMULATION UNIT VALUE--BEGINNING OF
PERIOD $ 9.20 $ 9.09 $ 9.03 $ 8.98
------ ------ ------ ------
Investment Income .16 .00 .00 .00
Expenses .11 .00 .00 .00
------ ------ ------ ------
Net Investment Income (Loss) .05 .00 .00 .00
Net Realized and Unrealized Gains
(Losses) on Securities (.65) .00 .04 .00
------ ------ ------ ------
Net Increase (Decrease) in Accumulation
Unit Value (.60) .00 .04 .00
------ ------ ------ ------
ACCUMULATION UNIT VALUE--END OF PERIOD $ 8.60 $ 9.09 $ 9.07 $ 8.98
------ ------ ------ ------
------ ------ ------ ------
RATIOS TO AVERAGE NET ASSETS*
Gross Expenses 3.94% 5.79% 4.22% 3.93%
Net Expenses 3.70% 3.70% 3.70% 3.70%
Net Investment Income (Loss) 1.67% 1.93% 1.79% 2.45%
SUPPLEMENTARY DATA:
Portfolio Turnover Rate** 0% 0% 0% 0%
Net Assets, End of Period (000's
omitted) $ 55 $ -- $ -- $ --
Number of Accumulation Units
Outstanding at End of Period 6,440 -- -- --

<CAPTION>
JUNO
SUBACCOUNT
JANUARY 20, 1998 TO
JANUARY 25, 1998
-------------------
<S> <C>
PER ACCUMULATION UNIT INCOME
PERFORMANCE:
ACCUMULATION UNIT VALUE--BEGINNING OF
PERIOD $ 8.88
------
Investment Income .01
Expenses .01
------
Net Investment Income (Loss) .00
Net Realized and Unrealized Gains
(Losses) on Securities .11
------
Net Increase (Decrease) in Accumulation
Unit Value .11
------
ACCUMULATION UNIT VALUE--END OF PERIOD $ 8.99
------
------
RATIOS TO AVERAGE NET ASSETS*
Gross Expenses 4.39%
Net Expenses 3.70%
Net Investment Income (Loss) 1.75%
SUPPLEMENTARY DATA:
Portfolio Turnover Rate** 0%
Net Assets, End of Period (000's
omitted) $ --
Number of Accumulation Units
Outstanding at End of Period --
</TABLE>

DUE TO THE NATURE OF THE INVESTMENT ACTIVITY, CERTAIN SUBACCOUNTS MAY
EXPERIENCE PERIODS WITH ZERO NET ASSETS. FINANCIAL HIGHLIGHTS ARE
PRESENTED FOR PERIODS WITH NET ASSETS GREATER THAN ZERO ONLY. PER
ACCUMULATION UNIT AMOUNTS ARE CALCULATED USING AVERAGE OUTSTANDING
UNITS.
* ANNUALIZED
** PORTFOLIO TURNOVER RATE IS CALCULATED WITHOUT REGARD TO SHORT-TERM
SECURITIES HAVING A MATURITY OF LESS THAN ONE YEAR.

60
<PAGE>

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

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNO
JUNO JUNO SUBACCOUNT* JUNO JUNO
SUBACCOUNT* SUBACCOUNT* JULY 24, 1997 SUBACCOUNT* SUBACCOUNT*
OCTOBER 22, 1997 TO AUGUST 26, 1997 TO TO JULY 7, JUNE 16, 1997 TO
DECEMBER 11, 1997 OCTOBER 19, 1997 AUGUST 11, 1997 1997 JULY 2, 1997
------------------- ------------------ --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
PER ACCUMULATION UNIT INCOME
PERFORMANCE:
ACCUMULATION UNIT VALUE--BEGINNING OF
PERIOD $ 9.50 $ 9.72 $ 9.41 $ 9.59 $ 9.71
------- ------ ------ ----------- ------
Investment Income .07 .07 .03 .00 .02
Expenses (.04) .06 .02 .00 .02
------- ------ ------ ----------- ------
Net Investment Income (Loss) .11 .01 .01 .00 .00
Net Realized and Unrealized Gains
(Losses) on Securities (.60) (.21) .26 (.05) (.03)
------- ------ ------ ----------- ------
Net Increase (Decrease) in
Accumulation Unit Value (.49) (.20) .27 (.05) (.03)
------- ------ ------ ----------- ------
ACCUMULATION UNIT VALUE--END OF PERIOD $ 9.01 $ 9.52 $ 9.68 $ 9.54 $ 9.68
------- ------ ------ ----------- ------
------- ------ ------ ----------- ------
RATIOS TO AVERAGE NET ASSETS**
Gross Expenses 19.73% 7.88% 3.23% 111.10% 5.71%
Net Expenses 2.90% 2.90% 2.90% 2.90% 2.90%
Net Investment Income (Loss) 8.68% 0.80% 1.50% 0.74% 1.29%
SUPPLEMENTARY DATA:
Portfolio Turnover Rate*** 0% 0% 0% 0% 0%
Net Assets, End of Period (000's
omitted) $ -- $ -- $ -- $ -- $ --
Number of Accumulation Units
Outstanding at End of Period -- -- -- -- --

JUNO
SUBACCOUNT*
MAY 7, 1997 TO
JUNE 3, 1997
--------------
<S> <C>
PER ACCUMULATION UNIT INCOME
PERFORMANCE:
ACCUMULATION UNIT VALUE--BEGINNING OF
PERIOD $ 10.00
-------
Investment Income .04
Expenses .04
-------
Net Investment Income (Loss) .00
Net Realized and Unrealized Gains
(Losses) on Securities (.14)
-------
Net Increase (Decrease) in
Accumulation Unit Value (.14)
-------
ACCUMULATION UNIT VALUE--END OF PERIOD $ 9.86
-------
-------
RATIOS TO AVERAGE NET ASSETS**
Gross Expenses 6.13%
Net Expenses 2.90%
Net Investment Income (Loss) (0.37)%
SUPPLEMENTARY DATA:
Portfolio Turnover Rate*** 0%
Net Assets, End of Period (000's
omitted) $ --
Number of Accumulation Units
Outstanding at End of Period --
</TABLE>

* COMMENCEMENT OF OPERATIONS: JUNO SUBACCOUNT--MAY 7, 1997
DUE TO THE NATURE OF THE INVESTMENT ACTIVITY, CERTAIN SUBACCOUNTS MAY
EXPERIENCE PERIODS WITH ZERO NET ASSETS. FINANCIAL HIGHLIGHTS ARE
PRESENTED FOR PERIODS WITH NET ASSETS GREATER THAN ZERO ONLY. PER
ACCUMULATION UNIT AMOUNTS ARE CALCULATED USING AVERAGE OUTSTANDING
UNITS.
** ANNUALIZED
*** PORTFOLIO TURNOVER RATE IS CALCULATED WITHOUT REGARD TO SHORT-TERM
SECURITIES HAVING A MATURITY OF LESS THAN ONE YEAR.

61
<PAGE>

BENCHMARK INFORMATION
- --------------------------------------------------------------------------------

NEITHER THE NOVA FUND NOR THE URSA FUND IS SPONSORED, ENDORSED, SOLD, OR
PROMOTED BY STANDARD & POOR'S CORP. (S&P); NEITHER THE OTC FUND NOR THE
ARKTOS FUND IS SPONSORED, ENDORSED, SOLD, OR PROMOTED BY NASDAQ OR ANY OF
NASDAQ'S AFFILIATES (NASDAQ AND ITS AFFILIATES HEREINAFTER COLLECTIVELY
REFERRED TO AS "NASDAQ"); AND THE METALS FUND IS NOT SPONSORED, ENDORSED,
SOLD, OR PROMOTED BY THE PHILADELPHIA STOCK EXCHANGE (PHLX), SPONSOR OF THE
XAU INDEX.

NONE OF S&P, NASDAQ, AND PHLX MAKE ANY REPRESENTATION OR WARRANTY, IMPLIED
OR EXPRESS, TO THE INVESTORS IN THE FUNDS, OR ANY MEMBER OF THE PUBLIC,
REGARDING THE ADVISABILITY OF INVESTING IN INDEX FUNDS OR THE ABILITY OF
THE S&P 500 INDEX, NASDAQ 100 INDEX-TM-, AND THE XAU INDEX, RESPECTIVELY,
TO TRACK GENERAL STOCK MARKET PERFORMANCE.

NONE OF S&P, NASDAQ, AND PHLX GUARANTEES THE ACCURACY AND/OR THE
COMPLETENESS OF THE S&P 500 INDEX, NASDAQ 100 INDEX-TM-, AND THE XAU INDEX,
RESPECTIVELY, OR ANY DATA INCLUDED THEREIN.

NONE OF S&P, NASDAQ, AND PHLX MAKE ANY WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY ANY OF THE FUNDS, THE INVESTORS IN THE FUNDS, OR
ANY PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX, THE NASDAQ 100
INDEX-TM-, THE XAU INDEX, RESPECTIVELY, OR ANY DATA INCLUDED THEREIN.

NONE OF S&P, NASDAQ, AND PHLX MAKE ANY EXPRESS OR IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE FOR USE WITH RESPECT TO
THE S&P 500 INDEX, THE NASDAQ 100 INDEX-TM-, THE XAU INDEX, RESPECTIVELY,
OR ANY DATA INCLUDED THEREIN.

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

62
<PAGE>

Additional information about the Funds is included in a Statement of Additional
Information dated November 1, 1998 (the "SAI"), which contains more detailed
information about the Funds. The SAI has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated by reference into this
Prospectus and, therefore, legally forms a part of this Prospectus. The SEC
maintains a Web site ("http://www.sec.gov") that contains the SAI, material
incorporated by reference, and other information regarding registrants that file
electronically with the SEC. You may also review and copy documents at the SEC
Public Reference Room in Washington, D.C. (for information call 1-800-SEC-0330).
You may request documents by mail from the SEC, upon payment of a duplication
fee, by writing to: Securities and Exchange Commission, Public Reference
Section, Washington, D.C. 20549-6009. To help you to obtain additional
information, the Fund's SEC registration number is 811-08821.

You may obtain a copy of the SAI or the annual or semi-annual reports,
without charge by calling 1-800-820-0888 or by writing to PADCO Service
Company, Inc., at 6116 Executive Boulevard, Suite 400, Rockville, Maryland
20852. Additional information about the investments of the Funds'
predecessor is available in the annual and semi-annual reports. Also, in the
annual report of the Funds' predecessor, you will find a discussion of the
market conditions and investment strategies that significantly affected
performance during its last fiscal year.

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

NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR IN THE TRUST'S SAI IN
CONNECTION WITH THE OFFERING OF FUND SHARES. DO NOT RELY ON ANY SUCH
INFORMATION OR REPRESENTATIONS AS HAVING BEEN AUTHORIZED BY THE TRUST OR PADCO
ADVISORS, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST IN
ANY JURISDICTION WHERE SUCH AN OFFERING IS NOT LAWFUL.

RYDEX VARIABLE TRUST

- --------------------------------------------------------------------------------
RYDEX-Registered Trademark-

INVESTMENT FLEXIBILITY
FOR INSTITUTIONAL MONEY MANAGERS
- --------------------------------------------------------------------------------

63
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

RYDEX VARIABLE TRUST

6116 EXECUTIVE BOULEVARD, SUITE 400
ROCKVILLE, MARYLAND 20852
800/820-0888
301/468-8520

Rydex Variable Trust (the "Trust") is a no-load mutual fund complex with
twenty-two separate investment portfolios (the "Funds"). This Statement of
Additional Information ("SAI") relates to Shares of following portfolios:

NOVA FUND
URSA FUND
OTC FUND
ARKTOS FUND
PRECIOUS METALS FUND
U.S. GOVERNMENT BOND FUND
JUNO FUND
BANKING FUND
BASIC MATERIALS FUND
BIOTECHNOLOGY FUND
CONSUMER PRODUCTS FUND
ELECTRONICS FUND
ENERGY FUND
ENERGY SERVICES FUND
FINANCIAL SERVICES FUND
HEALTH CARE FUND
LEISURE FUND
RETAILING FUND
TECHNOLOGY FUND
TELECOMMUNICATIONS FUND
TRANSPORTATION FUND
U.S. GOVERNMENT MONEY MARKET FUND

This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Trust's Prospectus, dated November 1, 1998. A copy of
the Trust's Prospectus is available, without charge, upon request to the Trust
at the address above or by telephoning the Trust at the telephone numbers above.

The date of this Statement of Additional Information is November 1, 1998.

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

TABLE OF CONTENTS

PAGE

GENERAL INFORMATION ABOUT THE TRUST. . . . . . . . . . . . . . . . . . . . . .

ADDITIONAL INFORMATION ABOUT THE SECTOR FUNDS. . . . . . . . . . . . . . . . .

DESCRIPTION OF THE MONEY MARKET FUND . . . . . . . . . . . . . . . . . . . . .

INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS . . . . . . . . . . . . . . .

INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . .

PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . . . . .

MANAGEMENT OF THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . . . . .

PRINCIPAL HOLDERS OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . . .

DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . .

PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .

CALCULATION OF RETURN QUOTATIONS . . . . . . . . . . . . . . . . . . . . . . .

INFORMATION ON COMPUTATION OF YIELD. . . . . . . . . . . . . . . . . . . . . .

PURCHASE AND REDEMPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . . .

DIVIDENDS, DISTRIBUTIONS, AND TAXES. . . . . . . . . . . . . . . . . . . . . .

OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

COUNSEL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

AUDITORS AND CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . .

FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

WA05/41215.3
2
<PAGE>

GENERAL INFORMATION ABOUT THE TRUST

The Trust, an open-end management investment company, was organized as a
Delaware business trust on June 11, 1998. The Trust is permitted to offer
separate portfolios of shares. Shares of the Funds are available through
certain deferred variable annuity and variable insurance contracts
("Contracts") offered through insurance companies, as well as to certain
retirement plan investors. Additional Funds and/or classes may be created
from time to time.

Currently, the Trust has twenty-two separate series. All payments received by
the Trust for shares of any fund belong to that fund. Each fund has its own
assets and liabilities. This SAI relates to shares of the Nova Fund, the Ursa
Fund, the OTC Fund, the Arktos Fund, the Precious Metals Fund (the "Metals
Fund"), the U.S. Government Bond Fund (the "Bond Fund"),the Juno Fund, the U.S.
Government Money Market Fund (the "Money Market Fund") and fourteen "Sector
Funds" (collectively the "Funds"). The Trust offers shares in the following
Sector Funds: Banking Fund, Basic Materials Fund, Biotechnology Fund, Consumer
Products Fund, Electronics Fund, Energy Fund, Energy Services Fund, Financial
Services Fund, Health Care Fund, Leisure Fund, Retailing Fund, Technology Fund,
Telecommunications Fund, and Transportation Fund.

The Trust is a successor to The Rydex Advisor Variable Annuity Account (the
"Separate Account"), a managed separate account of Great American Reserve
Insurance Company ("Great American") and the subaccounts of the Separate Account
(the "Rydex Subaccounts"). The Rydex Subaccounts were divided into the Nova
Subaccount, the Ursa Subaccount, the Juno Subaccount, the OTC Subaccount, the
Precious Metals Subaccount, the U.S. Government Bond Subaccount and the Money
Market Subaccount. A substantial portion of the assets of each of the Rydex
Subaccounts were transferred to the respective Funds of the Trust in connection
with the commencement of operations of the Trust.

ADDITIONAL INFORMATION ABOUT THE SECTOR FUNDS

BANKING FUND
As discussed in the Prospectus, the Fund may invest in companies engaged in
accepting deposits and making commercial and principally non-mortgage consumer
loans. In addition, these companies may offer services such as merchant
banking, consumer and commercial finance, discount brokerage, leasing and
insurance. These companies may concentrate their operations within a specific
part of the country rather than operating predominantly on a national or
international scale.

BASIC MATERIALS FUND
As discussed in the Prospectus, the Fund may invest in companies engaged in the
manufacture, mining, processing, or distribution of raw materials and
intermediate goods used in the industrial sector. The Fund may invest in
companies handling products such as chemicals, lumber, paper, cooper, iron ore,
nickel, steel, aluminum, textiles, cement, and gypsum. The Fund may also invest
in the securities of mining, processing, transportation, and distribution
companies, including equipment suppliers and railroads.

BIOTECHNOLOGY FUND
As discussed in the Prospectus, the Fund may invest in companies engaged in the
research, development, sale, and manufacture of various biotechnological
products, services and processes. These include companies involved with
developing or experimental technologies such as generic engineering, hybridoma
and recombinant DNA techniques and monoclonal antibodies. The Fund may also
invest in companies that manufacture and/or distribute biotechnological and
biomedical products, including devices and instruments, and that provide or
benefit

3
<PAGE>

significantly from scientific and technological advances in biotechnology. Some
biotechnology companies may provide processes or services instead of, or in
addition to, products.

The description of the biotechnology sector may be interpreted broadly to
include applications and developments in such areas as human health care
(cancer, infectious disease, diagnostics and therapeutics); pharmaceuticals (new
drug development and production); agricultural and veterinary applications
(improved seed varieties, animal growth hormones); chemicals (enzymes, toxic
waste treatment); medical/surgical (epidermal growth factor, in vivo
imaging/therapeutics); and industry (biochips, fermentation, enhanced mineral
recovery).

CONSUMER PRODUCTS FUND
As discussed in the Prospectus, the Fund may invest in companies engaged in the
manufacture of goods to consumers, both domestically and internationally. The
Fund may invest in companies that manufacture durable products such as
furniture, major appliances, and personal computers. The Fund also may invest
in companies that manufacture, wholesale or retail non-durable goods such as
beverages, tobacco, health care products, household and personal care products,
apparel, and entertainment products (E.G., books, magazines, TV, cable, movies,
music, gaming, and sports). In addition, the Fund may invest in consumer
products and services such as lodging, child care, convenience stores, and car
rentals.

ELECTRONICS FUND
As discussed in the Prospectus, the Fund may invest in companies engaged in
the design, manufacture, or sale of electronic components (semiconductors,
connectors, printed circuit boards and other components); equipment vendors
to electronic component manufactures; electronic component distributors; and
electronic instruments and electronic systems vendors. In addition, the Fund
may invest in companies in the fields of defense electronics, medical
electronics, consumer electronics, advanced manufacturing technologies
(computer-aided design and computer-aided manufacturing computer-aided
engineering, and robotics), lasers and electro-optics, and other developing
electronics technologies.

ENERGY FUND
As discussed in the Prospectus, the Fund may invest in companies in the energy
field, including the conventional areas of oil, gas, electricity and coal, and
alternative sources of energy such as nuclear, geothermal, oil shale and solar
power. The business activities of companies in which the Fund may invest
include production, generation, transmission, refining, marketing, control,
distribution or measurement of energy or energy fuels such as petrochemicals;
providing component parts or services to companies engaged in the above
activities; energy research or experimentation; and environmental activities
related to pollution control. Companies participating in new activities
resulting from technological advances or research discoveries in the energy
field may also be considered for this Fund.

ENERGY SERVICES FUND
As discussed in the Prospectus, the Fund may invest in companies in the energy
service field, including those that provide services and equipment to the
conventional areas of oil, gas, electricity and coal, and alternative sources of
energy such as nuclear, geothermal, oil shale and solar power. The Fund may
invest in companies involved in providing services and equipment for drilling
processes such as offshore and onshore drilling, drill bits, drilling rig
equipment, drilling string equipment, drilling fluids, tool joints and wireline
logging. Many energy service companies are engaged in production and well
maintenance, providing such products and services as packers, perforating
equipment, pressure pumping, downhole equipment, valves, pumps, compression
equipment, and well completion equipment and service. Certain companies supply
energy providers with exploration technology such as seismic data, geological
and geophysical services, and interpretation of this data. The Fund may also
invest in

4
<PAGE>

companies with a variety of underwater well services, helicopter services,
geothermal plant design or construction, electric and nuclear plant design or
construction, energy related capital equipment, mining related equipment or
services, and high technology companies serving these industries.

FINANCIAL SERVICES FUND
As discussed in the Prospectus, the Fund may invest in companies that are
involved in the financial sector, including commercial and investment banks,
savings and loan associations, consumer and industrial finance companies,
securities brokerage companies, real estate-related companies, leasing
companies, and a variety of firms in all segments of the insurance industry such
as multi-line, property and casualty, and life insurance.

The financial services sector is currently undergoing relatively rapid change as
existing distinctions between financial service segments become less clear. For
instance, recent business combinations have included insurance, finance, and
securities brokerage under single ownership. Some primarily retail corporations
have expanded into securities and insurance industries. Moreover, the federal
laws generally separating commercial and investment banking are currently being
studied by Congress.

Securities and Exchange Commission ("SEC") regulations provide that the Fund may
not invest more than 5% of its total assets in the securities of any one
company that derives more than 15% of its revenues from brokerage or investment
management activities. These companies, as well as those deriving more than 15%
of profits from brokerage and investment management activities, will be
considered to be "principally engaged" in this Fund's business activity. Rule
12d3-1 under the Investment Company Act of 1940 (the "1940 Act"), allows
investment portfolios such as this Fund, to invest in companies engaged in
securities-related activities subject to certain conditions. Purchases of
securities of a company that derived 15% or less of gross revenues during its
most recent fiscal year from securities-related activities (I.E., broker/dealer,
underwriting, or investment advisory activities) are subject only to the same
percentage limitations as would apply to any other security the Fund may
purchase. The Fund may purchase securities of an issuer that derived more than
15% of it gross revenues in its most recent fiscal year from securities-related
activities, subject to the following conditions:

a. the purchase cannot cause more than 5% of the Fund's total assets to be
invested in securities of that issuer;

b. for any equity security, the purchase cannot result in the Fund owing more
than 5% of the issuer's outstanding securities in that class;

c. for a debt security, the purchase cannot result in the fund owing more than
10% of the outstanding principal amount of the issuer's debt securities.

In applying the gross revenue test, an issuer's own securities-related
activities must be combined with its ratable share of securities-related
revenues from enterprises in which it owns a 20% or greater voting or equity
interest. All of the above percentage limitations, as well as the issuer's
gross revenue test, are applicable at the time of purchase. With respect to
warrants, rights, and convertible securities, a determination of compliance with
the above limitations shall be made as though such warrant, right, or conversion
privilege had been exercised. The Fund will not be required to divest its
holding of a particular issuer when circumstances subsequent to the purchase
cause one of the above conditions to not be met. The purchase of a general
partnership interest in a securities-related business is prohibited.

5
<PAGE>

HEALTH CARE FUND
As discussed in the Prospectus, the Fund may invest in companies that are
involved in the health care industry including companies engaged in the design,
manufacture, or sale of products or services used for or in connection with
health care or medicine. Companies in the health care sector may include
pharmaceutical companies; firms that design, manufacture, sell, or supply
medical, dental, and optical products, hardware or services; companies involved
in biotechnology, medical diagnostic, and biochemical research and development,
as well as companies involved in the operation of health care facilities.

LEISURE FUND
As discussed in the Prospectus, the Fund may invest in companies engaged in the
design, production, or distribution of goods or services in the leisure
industries including television and radio broadcasting or manufacturing
(including cable television); motion pictures and photography; recordings and
musical instruments; publishing, including newspapers and magazines; sporting
goods and camping and recreational equipment; and sports arenas. Other goods
and services may include toys and games (including video and other electronic
games), amusement and theme parks, travel and travel-related services, hotels
and motels, leisure apparel or footwear, tobacco products, and gaming casinos.

RETAILING FUND
As discussed in the Prospectus, the Fund may invest in companies that are
involved in the retailing sector including companies engaged in merchandising
finished goods and services primarily to individual consumers. Companies in
which the Fund may invest include general merchandise retailers, department
stores, restaurant franchises, drug stores, motor vehicle and marine dealers,
and any specialty retailers selling a single category of merchandise such as
apparel, toys, jewelry, consumer electronics, or home improvement products. The
Fund may also invest in companies engaged in selling goods and services through
alternative means such as direct telephone marketing, mail order, membership
warehouse clubs, computer, or video based electronic systems.

TECHNOLOGY FUND
As discussed in the Prospectus, the Fund may invest in companies that are
involved in the technology sector including companies which the Advisor
believes have, or will develop, products, processes or services that will
provide or will benefit significantly from technological advances and
improvements. These may include, for example, companies that develop, produce,
or distribute products or services in the computer, semiconductor, electronics,
communications, health care, and biotechnology sectors.

TELECOMMUNICATIONS FUND
As discussed in the Prospectus, the Fund may invest in companies that are
involved in the telecommunications sector including companies engaged in the
development, manufacture, or sale of communications services and/or equipment.
Companies in the telecommunications field offer a variety of services and
products, including local and long-distance telephone service; cellular, paging,
local and wide-area product networks; satellite, microwave and cable television;
Internet access; and equipment used to provide these products and services.
Long-distance telephone companies may also have interests in developing
technologies, such as fiber optics and data transmission. Certain types of
companies in which the Fund may invest are engaged in fierce competition for a
share of the market for goods or services such as private and local area
networks, or are engaged in the sale of telephone set equipment.

TRANSPORTATION FUND
As discussed in the Prospectus, the Fund may invest in companies that are
involved in the transportation sector, including companies engaged in providing
transportation services or companies engaged in the design,

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manufacture, distribution, or sale of transportation equipment. Transportation
services may include companies involved in the movement of freight and/or people
such as airline, railroad, ship, truck, and bus companies. Other service
companies include those that provide leasing and maintenance for automobiles,
trucks, containers, rail cars, and planes. Equipment manufacturers include
makers of trucks, automobiles, planes, containers, rail cars, or any other mode
of transportation and their related products. In addition, the Fund may invest
in companies that sell fuel-saving devices to the transportation industries and
those that sell insurance and software developed primarily for transportation
companies.

DESCRIPTION OF THE MONEY MARKET FUND

As discussed in the Prospectus, the Money Market Fund seeks to provide security
of principal, high current income, and liquidity. The Money Market Fund invests
primarily in money market instruments issued or guaranteed as to principal and
interest by the U.S. Government, its agencies or instrumentalities, and may
invest any remaining assets in receipts and enter into repurchase agreements
fully collateralized by U.S. Government Securities.

The Money Market Fund is governed by SEC rules which impose certain liquidity,
maturity and diversification requirements. The Money Market Fund's assets are
valued using the amortized cost method, which enables the Money Market Fund to
maintain a stable NAV. All securities purchased by the Money Market Fund must
have remaining maturities of 397 days or less. Although the Money Market Fund
is managed to maintain a stable price per share of $1.00, there is no guarantee
that the price will be constantly maintained.

INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS

GENERAL
Each Fund's investment objective and permitted investments are described in the
Prospectuses under the headings "FUND INFORMATION" and "FUND PERFORMANCE AND FEE
INFORMATION". The following information supplements, and should be read in
conjunction with, those sections of the Prospectuses.

Portfolio management is provided to each Fund by the Trust's investment adviser,
PADCO Advisors II, Inc., a Maryland corporation with offices at 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852 (the "Advisor"). The investment
strategies of the Funds discussed below and in the Prospectuses may be used by a
Fund if, in the opinion of the Advisor, these strategies will be advantageous to
that Fund. A Fund is free to reduce or eliminate its activity in any of those
areas without changing the Fund's fundamental investment policies. There is no
assurance that any of these strategies or any other strategies and methods of
investment available to a Fund will result in the achievement of that Fund's
objectives.

BORROWING
The Nova Fund, the Bond Fund and the Sector Funds may borrow money, including
borrowing for investment purposes. Borrowing for investment is known as
leveraging. Leveraging investments, by purchasing securities with borrowed
money, is a speculative technique which increases investment risk, but also
increases investment opportunity. Since substantially all of a Fund's assets
will fluctuate in value, whereas the interest obligations on borrowings may be
fixed, the net asset value per share of the Fund will increase more when the
Fund's portfolio assets increase in value and decrease more when the Fund's
portfolio assets decrease in value than would otherwise be the case. Moreover,
interest costs on borrowings may fluctuate with changing market rates of
interest and may partially offset or exceed the returns on the borrowed funds.
Under adverse conditions, the Nova Fund, the Bond Fund, or the Sector Funds
might have to sell portfolio securities to meet interest or principal payments

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at a time investment considerations would not favor such sales. The Nova Fund,
the Bond Fund and the Sector Funds intend to use leverage during periods when
the Advisor believes that the respective Fund's investment objective would be
furthered.

Each Fund may borrow money to facilitate management of the Fund's portfolio by
enabling the Fund to meet redemption requests when the liquidation of portfolio
instruments would be inconvenient or disadvantageous. Such borrowing is not for
investment purposes and will be repaid by the borrowing Fund promptly.

As required by the 1940 Act, a Fund must maintain continuous asset coverage
(total assets, including assets acquired with borrowed funds, less liabilities
exclusive of borrowings) of 300% of all amounts borrowed. If, at any time, the
value of the Fund's assets should fail to meet this 300% coverage test, the
Fund, within three days (not including Sundays and holidays), will reduce the
amount of the Fund's borrowings to the extent necessary to meet this 300%
coverage. Maintenance of this percentage limitation may result in the sale of
portfolio securities at a time when investment considerations otherwise indicate
that it would be disadvantageous to do so.

In addition to the foregoing, the Funds are authorized to borrow money from a
bank as a temporary measure for extraordinary or emergency purposes in amounts
not in excess of 5% of the value of the Fund's total assets. This borrowing is
not subject to the foregoing 300% asset coverage requirement The Funds are
authorized to pledge portfolio securities as the Advisor deems appropriate in
connection with any borrowings.

FOREIGN ISSUERS
The Metals Fund and the Sector Funds may invest in issuers located outside the
United States. The Metals Fund and the Sector Funds may purchase American
Depository Receipts ("ADRs"), "ordinary shares," or "New York shares" in the
United States. ADRs are dollar-denominated receipts representing interests in
the securities of a foreign issuer, which securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by United States banks and trust
companies which evidence ownership of underlying securities issued by a foreign
corporation. Generally, ADRs in registered form are designed for use in
domestic securities markets and are traded on exchanges or over-the-counter in
the United States. Ordinary shares are shares of foreign issuers that are
traded abroad and on a United States exchange. New York shares are shares that
a foreign issuer has allocated for trading in the United States. ADRs, ordinary
shares, and New York shares all may be purchased with and sold for U.S. dollars,
which protect the Funds from the foreign settlement risks described below.

Investing in foreign companies may involve risks not typically associated with
investing in United States companies. The value of securities denominated in
foreign currencies, and of dividends from such securities, can change
significantly when foreign currencies strengthen or weaken relative to the U.S.
dollar. Foreign securities markets generally have less trading volume and less
liquidity than United States markets, and prices in some foreign markets can ve
very volatile. Many foreign countries lack uniform accounting and disclosure
standards comparable to those that apply to United States companies, and it may
be more difficult to obtain reliable information regarding a foreign issuer's
financial condition and operations. In addition, the costs of foreign
investing, including withholding taxes, brokerage commissions, and custodial
fees, generally are higher than for United States investments.

Investing in companies located abroad carries political and economic risks
distinct from those associated with investing in the United States. Foreign
investment may be affected by actions of foreign governments adverse to the
interests of United States investors, including the possibility of expropriation
or nationalization of assets, confiscatory taxation, restrictions on United
States investment, or on the ability to repatriate assets or to convert

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currency into U.S. dollars. There may be a greater possibility of default by
foreign governments or foreign-government sponsored enterprises. Investments in
foreign countries also involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments.

With regard to the Metals Fund, at the present time, five countries are the
major producers and processors of gold bullion and other precious metals and
minerals. In order of magnitude, these producers and processors are: the
Republic of South Africa, the former republics of the former Soviet Union,
Canada, the United States, and Australia. Political and economic conditions in
South Africa and the former republics of the former Soviet Union may have a
direct effect on the mining, distribution, and price of precious metals and
minerals, and on the sales of central bank gold holdings. South African mining
stocks represent a special risk in view of the history of political unrest in
that country. Besides that factor, various government bodies such as the South
African Ministry of Mines and the Reserve Bank of South Africa exercise
regulatory authority over mining activity and the sale of gold. The policies of
these South African government bodies in the future could be detrimental to the
Metals Fund's ability to achieve its objectives.

ILLIQUID SECURITIES
While none of the Funds anticipates doing so, each Fund may purchase illiquid
securities, including securities that are not readily marketable and securities
that are not registered ("restricted securities") under the Securities Act of
1933, as amended (the "1933 Act"), but which can be offered and sold to
"qualified institutional buyers" under Rule 144A under the 1933 Act. A Fund
will not invest more than 15% (10% with respect to the Money Market Fund) of the
Fund's net assets in illiquid securities. Each Fund will adhere to a more
restrictive limitation on the Fund's investment in illiquid securities as
required by the securities laws of those jurisdictions where shares of the Fund
are registered for sale. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities. Under the current guidelines of the staff of the Securities and
Exchange Commission (the "Commission"), illiquid securities also are considered
to include, among other securities, purchased over-the-counter options, certain
cover for over-the-counter options, repurchase agreements with maturities in
excess of seven days, and certain securities whose disposition is restricted
under the Federal securities laws. The Fund may not be able to sell illiquid
securities when the Advisor considers it desirable to do so or may have to sell
such securities at a price that is lower than the price that could be obtained
if the securities were more liquid. In addition, the sale of illiquid
securities also may require more time and may result in higher dealer discounts
and other selling expenses than does the sale of securities that are not
illiquid. Illiquid securities also may be more difficult to value due to the
unavailability of reliable market quotations for such securities, and investment
in illiquid securities may have an adverse impact on net asset value.

Institutional markets for restricted securities have developed as a result of
the promulgation of Rule 144A under the 1933 Act, which provides a "safe harbor"
from 1933 Act registration requirements for qualifying sales to institutional
investors. When Rule 144A restricted securities present an attractive
investment opportunity and other meet selection criteria, a Fund may make such
investments. whether or not such securities are "illiquid" depends on the market
that exists for the particular security. The trustees of the Trust (the
"Trustees") have delegated the responsibility for determining the liquidity of
Rule 144A restricted securities which may be invested in by a Fund to the
Advisor.

INVESTMENTS IN OTHER INVESTMENT COMPANIES
The Funds (other than the Bond Fund, the Money Market Fund, and the Sector
Funds) presently may invest in the securities of other investment companies to
the extent that such an investment would be consistent with the requirements of
Section 12(d)(1) of the 1940 Act. A Fund, therefore, may invest in the
securities of another

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<PAGE>

investment company (the "acquired company") provided that the Fund, immediately
after such purchase or acquisition, does not own in the aggregate: (i) more
than 3% of the total outstanding voting stock of the acquired company;
(ii) securities issued by the acquired company having an aggregate value in
excess of 5% of the value of the total assets of the Fund; or (iii) securities
issued by the acquired company and all other investment companies (other than
Treasury stock of the Fund) having an aggregate value in excess of 10% of the
value of the total assets of the Fund. The Bond Fund, the Money Market Fund and
the Sector Funds may invest in the securities of other investment companies only
as part of a merger, reorganization, or acquisition, subject to the requirements
of the 1940 Act.

If a Fund invests in, and, thus, is a shareholder of, another investment
company, the Fund's shareholders will indirectly bear the Fund's proportionate
share of the fees and expenses paid by such other investment company, including
advisory fees, in addition to both the management fees payable directly by the
Fund to the Fund's own investment adviser and the other expenses that the Fund
bears directly in connection with the Fund's own operations.

LENDING OF PORTFOLIO SECURITIES
Subject to the investment restrictions set forth below, each of the Funds may
lend portfolio securities to brokers, dealers, and financial institutions,
provided that cash equal to at least 100% of the market value of the securities
loaned is deposited by the borrower with the Fund and is maintained each
business day in a segregated account pursuant to applicable regulations. while
such securities are on loan, the borrower will pay the lending Fund any income
accruing thereon, and the Fund may invest the cash collateral in portfolio
securities, thereby earning additional income. A Fund will not lend its
portfolio securities if such loans are not permitted by the laws or regulations
of any state in which the Fund's shares are qualified for sale, and the Funds
will not lend more than 33 1/3% of the value of the Fund's total assets, except
that the Money Market Fund will not lend more than 10% of the value of the Money
Market Fund's total assets. Loans would be subject to termination by the
lending Fund on four business days' notice, or by the borrower on one day's
notice. Borrowed securities must be returned when the loan is terminated. Any
gain or loss in the market price of the borrowed securities which occurs during
the term of the loan inures to the lending Fund and that Fund's shareholders. A
lending Fund may pay reasonable finders, borrowers, administrative, and
custodial fees in connection with a loan.

OPTIONS TRANSACTIONS

OPTIONS ON SECURITIES. The Nova Fund, the OTC Fund, the Metals Fund and the
Sector Funds may buy call options and write (sell) put options on securities,
and the Ursa Fund and the Arktos Fund may buy put options and write call options
on securities for the purpose of realizing the Fund's investment objective. By
wiring a call option on securities, a Fund becomes obligated during the term of
the option to sell the securities underlying the option at the exercise price if
the option is exercised. By writing a put option, a Fund becomes obligated
during the term of the option to purchase the securities underlying the option
at the exercise price if the option is exercised.

During the term of the option, the writer may be assigned an exercise notice by
the broker-dealer through whom the option was sold. The exercise notice would
require the writer to deliver, in the case of a call, or take delivery of, in
the case of a put, the underlying security against payment of the exercise
price. This obligation terminates upon expiration of the option, or at such
earlier time that the writer effects a closing purchase transaction by
purchasing an option covering the same underlying security and having the same
exercise price and expiration date as the one previously sold. Once an option
has been exercised, the writer may not execute a closing purchase transaction.
To secure the obligation to deliver the underlying security in the case of a
call option, the writer of

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<PAGE>

a call option is required to deposit in escrow the underlying security or other
assets in accordance with the rules of the Option Clearing Corporation (the
"OCC"), an institution created to interpose itself between buyers and sellers of
options. The OCC assumes the other side of every purchase and sale transaction
on an exchange and, by doing so, gives its guarantee to the transaction.

OPTIONS ON SECURITY INDEXES. The Nova Fund, the OTC Fund, the Metals Fund and
the Sector Funds may purchase call options and write put options, and the Ursa
Fund and the Arktos Fund may purchase put options and write call options, on
stock indexes listed on national securities exchanges or traded in the
over-the-counter market as an investment vehicle for the purpose of realizing
the Fund's investment objective.

Options on indexes are settled in cash, not in delivery of securities. The
exercising holder of an index option receives, instead of a security, cash equal
to the difference between the closing price of the securities index and the
exercise price of the option. When a Fund writes a covered option on an index,
the Fund will be required to deposit and maintain with a custodian cash or
liquid securities equal in value to the aggregate exercise price of a put or
call option pursuant to the requirements and the rules of the applicable
exchange. If, at the close of business on any day, the market value of the
deposited securities falls below the contract price, the Fund will deposit with
the custodian cash or liquid securities equal in value to the deficiency.

OPTIONS ON FUTURES CONTRACTS. Under Commodities Futures Trading Commission
("CFTC") Regulations, a Fund (other than the Money Market Fund) may engage in
futures transactions, either for "bona fide hedging" purposes, as this term is
defined in the CFTC Regulations, or for non-hedging purposes to the extent that
the aggregate initial margins and option premiums required to establish such
non-hedging positions do not exceed 5% of the liquidation value of the Fund's
portfolio. In the case of an option on futures contracts that is "in-the-money"
at the time of purchase (I.E., the amount by which the exercise price of the put
option exceeds the current market value of the underlying security, or the
amount by which the current market value of the underlying security exceeds the
exercise price of the call option), the in-the-money amount may be excluded in
calculating this 5% limitation.

When a Fund purchases or sells a stock index futures contract, or sells an
option thereon, the Fund "covers" its position. To cover its position, a Fund
may maintain with its custodian bank (and marked-to-market on a daily basis), a
segregated account consisting of cash or liquid securities that, when added to
any amounts deposited with a futures commission merchant as margin, are equal to
the market value of the futures contract or otherwise "cover" its position. If
the Fund continues to engage in the described securities trading practices and
properly segregates assets, the segregated account will function as a practical
limit on the amount of leverage which the Fund may undertake and on the
potential increase in the speculative character of the Fund's outstanding
portfolio securities. Additionally, such segregated accounts will generally
assure the availability of adequate funds to meet the obligations of the Fund
arising from such investment activities.

A Fund may cover its long position in a futures contract by purchasing a put
option on the same futures contract with a strike price (I.E., an exercise
price) as high or higher than the price of the futures contract. In the
alternative, if the strike price of the put is less than the price of the
futures contract, the Fund will maintain in a segregated account cash or liquid
securities equal in value to the difference between the strike price of the put
and the price of the futures contract. A Fund may also cover its long position
in a futures contract by taking a short position in the instruments underlying
the futures contract, or by taking positions in instruments with prices which
are expected to move relatively consistently with the futures contract. A Fund
may cover its short position in a futures contract by taking a long position in
the instruments underlying the futures contracts, or by taking positions in
instruments with prices which are expected to move relatively consistently with
the futures contract.

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<PAGE>

A Fund may cover its sale of a call option on a futures contract by taking a
long position in the underlying futures contract at a price less than or equal
to the strike price of the call option. In the alternative, if the long
position in the underling futures contracts is established at a price greater
than the strike price of the written (sold) call, the Fund will maintain in a
segregated account cash or liquid securities equal in value to the difference
between the strike price of the call and the price of the futures contract. A
Fund may also cover its sale of a call option by taking positions in instruments
with prices which are expected to move relatively consistently with the call
option. A Fund may cover its sale of a put option on a futures contract by
taking a short position in the underlying futures contract at a price greater
than or equal to the strike price of the put option, or, if the short position
in the underlying futures contract is established at a price less than the
strike price of the written put, the Fund will maintain in a segregated account
cash or liquid securities equal in value to the difference between the strike
price of the put and the price of the futures contract. A Fund may also cover
its sale of a put option by taking positions in instruments with prices which
are expected to move relatively consistently with the put option.

PORTFOLIO TURNOVER
As discussed in the Trust's prospectus, the Trust anticipates that investors in
the Funds, as part of an asset allocation investment strategy, will frequently
purchase and/or redeem shares of the Funds . The nature of the Funds as asset
allocation tools will cause the Funds to experience substantial portfolio
turnover. (See "Risk Considerations" in the Trust's Prospectus). Because each
Fund's portfolio turnover rate to a great extent will depend on the purchase,
redemption, and exchange activity of the Fund's investors, it is very difficult
to estimate what the Fund's actual turnover rate will be in the future.
However, the Trust expects that the portfolio turnover experienced by the Funds
will be substantial.

REPURCHASE AGREEMENTS
As discussed in the Trust's Prospectus, each of the Funds may enter into
repurchase agreements with financial institutions. The Funds each follow
certain procedures designed to minimize the risks inherent in such agreements.
These procedures include effecting repurchase transactions only with large,
well-capitalized and well-established financial institutions whose condition
will be continually monitored by the Advisor. In addition, the value of the
collateral underlying the repurchase agreement will always be at least equal to
the repurchase price, including any accrued interest earned on the repurchase
agreement. In the event of a default or bankruptcy by a selling financial
institution, a Fund will seek to liquidate such collateral. However, the
exercising of each Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price, the
Fund could suffer a loss. It is the current policy of each of the Funds, other
than the Money Market Fund, not to invest in repurchase agreements that do not
mature within seven days if any such investment, together with any other
illiquid assets held by the Fund, amounts to more than 15% (10% with respect to
the Money Market Fund) of the Fund's total assets. The investments of each of
the Funds in repurchase agreements, at times, may be substantial when, in the
view of the Advisor, liquidity or other considerations so warrant.

REVERSE REPURCHASE AGREEMENTS
The Ursa Fund, the Juno Fund, and the Money Market Fund may use reverse
repurchase agreements as part of that Fund's investment strategy. Reverse
repurchase agreements involve sales by a Fund of portfolio assets concurrently
with an agreement by the Fund to repurchase the same assets at a later date at a
fixed price. Generally, the effect of such a transaction is that the Fund can
recover all or most of the cash invested in the portfolio securities involved
during the term of the reverse repurchase agreement, while the Fund will be able
to keep the interest income associated with those portfolio securities. Such
transactions are advantageous only if the interest cost to the Fund of the
reverse repurchase transaction is less than the cost of obtaining the cash
otherwise. Opportunities to achieve this advantage may not always be available,
and the Funds intend to use the reverse

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<PAGE>

repurchase technique only when this will be to the Fund's advantage to do so.
Each Fund will establish a segregated account with the Trust's custodian bank in
which the Fund will maintain cash or cash equivalents or other portfolio
securities equal in value to the Fund's obligations in respect of reverse
repurchase agreements.

SHORT SALES
The Ursa Fund, the Arktos Fund, and the Juno Fund also may engage in short sales
transactions under which the Fund sells a security it does not own. To complete
such a transaction, the Fund must borrow the security to make delivery to the
buyer. The fund then is obligated to replace the security borrowed by
purchasing the security at the market price at the time of replacement. The
price at such time may be more or less than the price at which the security was
sold by the Fund. 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. To borrow the security, the Fund also may be required to
pay a premium, which would increase the cost of the security sold. The proceeds
of the short sale will be retained by the broker, to the extent necessary to
meet the margin requirements, until the short position is closed out.

Until the Ursa Fund, Arktos Fund, or Juno Fund closes its short position or
replaces the borrowed security, the Fund will: (a) maintain a segregated
account containing cash or liquid securities at such a level that (i) the
amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short and (ii)
the amount deposited in the segregated account plus the amount deposited with
the broker as collateral will not be less than the market value of the
security at the time the security was sold short; or (b) otherwise cover the
Fund's short position. Each of the Funds may sell up to 100% of its portfolio
short.

The Nova Fund, the OTC Fund, the Metals Fund and the Sector Funds each may
engage in short sales if, at the time of the short sale, the Fund owns or has
the right to acquire an equal amount of the security being sold at no additional
cost. These Funds may make a short sale when the Fund wants to sell the
security the Fund owns at a current attractive price, in order to hedge or limit
the exposure of the Fund's position.

STOCK INDEX FUTURES CONTRACTS
A Fund may buy and sell stock index futures contracts with respect to any stock
index traded on a recognized stock exchange or board of trade. A stock index
futures contract is a contract to buy or sell units of an index at a specified
future date at a price agreed upon when the contract is made. The stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract.

At the time a Fund purchases a futures contract, an amount of cash, U.S.
Government securities or other liquid securities equal to the market value of
the futures contract will be deposited in a segregated account with the Fund's
custodian. When writing a futures contract, the Fund will maintain with its
custodian liquid assets that, when added to the amounts deposited with a futures
commission merchant or broker as margin, are equal to the market value of the
instruments underlying the contract. Alternatively, a Fund may "cover" its
position by owning the instruments underlying the contract (or, in the case of
an index futures contract, a portfolio with a volatility substantially similar
to that of the index on which the futures contract is based), or holding a call
option permitting the Fund to purchase the same futures contract at a price no
higher than the price of the contract written by the Fund (or at a higher price
if the difference is maintained in liquid assets with the Fund's custodian).

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<PAGE>

TRACKING ERROR
Funds which seek to duplicate the performance of their respective benchmarks, as
discussed in the Prospectus, do not expect that the returns over a year will
deviate adversely from their respective benchmarks by more than ten percent,
several factors may affect their ability to achieve this correlation. Among
these are: (1) Fund expenses, including brokerage (which may, be increased by
high portfolio turnover); (2) less than all of the securities in the benchmark
being held by a Fund and securities not included in the benchmark being held by
a Fund; (3) an imperfect correlation between the performance of instruments held
by a Fund, such as futures contracts and options, and the dance of the
underlying securities in the cash market; (4) bid-ask spreads (the effect of
which may be increased by portfolio turnover); (5) a Fund holds instruments
traded in a market that has become illiquid or disrupted; (6) Fund share prices
being rounded to the nearest cent; (7) changes to the benchmark index that are
not disseminated in advance; (8) the need to conform a Fund's portfolio holdings
to comply with investment restrictions or policies or regulatory or tax law
requirements; or (9) market movements that run counter to a leveraged Fund's
investments (which will cause divergence between the Fund and its benchmark over
time due to the mathematical effects of leveraging). Market movements that run
counter to a leveraged Fund's investments will cause some divergence between the
Fund and its benchmark over time due to the mathematical effects of leveraging.
The magnitude of the divergence is dependent upon the magnitude of the market
movement, its duration, and the degree to which the Fund is leveraged. The
tracking error of a leveraged Fund is generally small during a well-defined
uptrend or downtrend in the market when measured from price peak to price peak,
access a market decline and subsequent recovery, however, the deviation of the
Fund from its benchmark may be significant.

U.S. GOVERNMENT SECURITIES
The Bond Fund invests primarily in U.S. Government Securities, and each of the
other Funds also may invest in U.S. Government Securities. The Juno Fund may
enter into short transactions on U.S. Government Securities. Securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities
include U.S. Treasury securities, which are backed by the full faith and credit
of the U.S. Treasury and which differ only in their interest rates, maturities,
and times of issuance. U.S. Treasury bills have initial maturities of one year
or less; U.S. Treasury notes have initial maturities of one to ten years; and
U.S. Treasury bonds generally have initial maturities of greater than ten years.
Certain U.S. Government Securities are issued or guaranteed by agencies or
instrumentalities of the U.S. Government including, but not limited to,
obligations of U.S. Government agencies or instrumentalities such as Fannie Mae,
the Government National Mortgage Association, the Small Business Administration,
the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for
Cooperatives (including the Central Bank for Cooperatives), the Federal Land
Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority,
the Export-Import Bank of the United States, the Commodity Credit Corporation,
the Federal Financing Bank, the Student Loan Marketing Association, and the
National Credit Union Administration.

Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, including, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury. Other obligations issued by or guaranteed by
Federal agencies, such as those securities issued by Fannie Mae, are supported
by the discretionary authority of the U.S. Government to purchase certain
obligations of the Federal agency, while other obligations issued by or
guaranteed by Federal agencies, such as those of the Federal Home Loan Banks,
are supported by the right of the issuer to borrow from the U.S. Treasury, while
the U.S. Government provides financial support to such U.S. Government-sponsored
Federal agencies, no assurance can be given that the U.S. Government will always
do so, since the U.S. Government is not so obligated by law. U.S. Treasury
notes and bonds typically pay coupon interest semi-annually and repay the
principal at maturity. The Bond Fund will invest in such U.S. Government
Securities only when the Advisor is satisfied that

14
<PAGE>

the credit risk with respect to the issuer is minimal.

WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Each Fund, from time to time, in the ordinary course of business, may purchase
securities on a when-issued or delayed-delivery basis (I.E., delivery and
payment can take place between a month and 120 days after the date of the
transaction). These securities are subject to market fluctuation and no
interest accrues to the purchaser during this period. At the time a Fund makes
the commitment to purchase securities on a when-issued or delayed-delivery
basis, the Fund will record the transaction and thereafter reflect the value of
the securities, each day, of such security in determining the Fund's net asset
value. A Fund will not purchase securities on a when-issued or delayed-delivery
basis if, as a result, more than 15% (10% with respect to the Money Market Fund)
of the Fund's net assets would be so invested. At the time of delivery of the
securities, the value of the securities may be more or less than the purchase
price. The Fund will also establish a segregated account with the Fund's
custodian bank in which the Fund will maintain cash or liquid securities equal
to or greater in value than the Fund's purchase commitments for such when-issued
or delayed-delivery securities. The Trust does not believe that a Fund's net
asset value or income will be adversely affected by the Fund's purchase of
securities on a when-issued or delayed-delivery basis.

YEAR 2000
The Trust depends on the smooth functioning of computer systems in almost every
aspect of its business. Like other mutual funds, businesses and individuals
around the world, the Trust could be adversely affected if the computer systems
used by its service providers do not properly process dates on and after January
1, 2000 and distinguish between the year 2000 and the year 1900. The Trust has
asked its service providers whether they expect to have their computer systems
adjusted for the year 2000 transition, and received assurances from each from
each that its system is expected to accommodate the year 2000 without material
adverse consequences to the Trust. The Trust and its shareholders may
experience losses if these assurances prove to be incorrect or as a result of
year 2000 computer difficulties experienced by issuers of portfolio securities
or third parties, such as custodians, banks, broker-dealers or others with which
the Trust does business.

ZERO COUPON BONDS
The Bond Fund and the Juno Fund may invest in U.S. Treasury zero-coupon bonds.
These securities are U.S. Treasury bonds which have been stripped of their
unmatured interest coupons, the coupons themselves, and receipts or certificates
representing interests in such stripped debt obligations and coupons. Interest
is not paid in cash during the term of these securities, but is accrued and paid
at maturity. Such obligations have greater price volatility than coupon
obligations and other normal interest-paying securities, and the value of zero
coupon securities reacts more quickly to changes in interest rates than do
coupon bonds. Since dividend income is accrued throughout the term of the zero
coupon obligation, but is not actually received until maturity, the Fund may
have to sell other securities to pay said accrued dividends prior to maturity of
the zero coupon obligation. Unlike regular U.S. Treasury bonds which pay
semi-annual interest, U.S. Treasury zero coupon bonds do not generate
semi-annual coupon payments. Instead, zero coupon bonds are purchased at a
substantial discount from the maturity value of such securities, the discount
reflecting the current value of the deferred interest; this discount is
amortized as interest income over the life of the security, and is taxable even
though there is no cash return until maturity. Zero coupon U.S. Treasury issues
originally were created by government bond dealers who bought U.S. Treasury
bonds and issued receipts representing an ownership interest in the interest
coupons or in the principal portion of the bonds. Subsequently, the U.S.
Treasury began directly issuing zero coupon bonds with the introduction of
"Separate Trading of Registered Interest and Principal of Securities" (or
"STRIPS"). While zero coupon bonds eliminate the reinvestment risk of regular
coupon issues, that is, the risk of subsequently investing the periodic interest
payments at a lower rate than that of the security held, zero coupon bonds
fluctuate much more

15
<PAGE>

sharply than regular coupon-bearing bonds. Thus, when interest rates rise, the
value of zero coupon bonds will decrease to a greater extent than will the value
of regular bonds having the same interest rate.

INVESTMENT RESTRICTIONS

FUNDAMENTAL POLICIES
The following investment limitations (and those set forth in the Prospectuses)
are fundamental policies of the Funds which cannot be changed with respect to a
Fund without the consent of the holders of a majority of that Fund's outstanding
shares. The term "majority of the outstanding shares" means the vote of (i) 67%
or more of a Fund's shares present at a meeting, if more than 50% of the
outstanding shares of that Fund are present or represented by proxy, or (ii)
more than 50% of that Fund's outstanding shares, whichever is less.

A Fund shall not:

1. Lend any security or make any other loan if, as a result, more than
33 1/3% of the value of the Fund's total assets would be lent to other
parties, except (i) through the purchase of a portion of an issue of
debt securities in accordance with the Fund's investment objective,
policies, and limitations, or (ii) by engaging in repurchase
agreements with respect to portfolio securities, or (iii) through the
loans of portfolio securities provided the borrower maintains
collateral equal to at least 100% of the value of the borrowed
security and marked-to-market daily.

2. Underwrite securities of any other issuer.

3. Purchase, hold, or deal in real estate or oil and gas interests,
although the Fund may purchase and sell securities that are secured by
real estate or interests therein and may purchase mortgage-related
securities and may hold and sell real estate acquired for the Fund as
a result of the ownership of securities.

4. Issue any senior security (as such term is defined in Section 18(f) of
the 1940 Act) (including the amount of senior securities issued but
excluding liabilities and indebtedness not constituting senior
securities), except that the Fund may issue senior securities in
connection with transactions in options, futures, options on futures,
and other similar investments, and except as otherwise permitted
herein and in Investment Restriction Nos. 5, 7, 8, and 9, as
applicable to the Fund.

5. Pledge, mortgage, or hypothecate the Fund's assets, except to the
extent necessary to secure permitted borrowings and to the extent
related to the deposit of assets in escrow in connection with (i) the
writing of covered put and call options, (ii) the purchase of
securities on a forward-commitment or delayed-delivery basis, and
(iii) collateral and initial or variation margin arrangements with
respect to currency transactions, options, futures contracts,
including those relating to indexes, and options on futures contracts
or indexes.

6. Invest in commodities except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies,
indexes, and options on futures contracts or indexes and currencies
underlying or related to any such futures contracts, and purchase and
sell currencies (and options thereon) or securities on a
forward-commitment or delayed-delivery basis.

6.1 THE METALS FUND MAY (a) TRADE IN FUTURES CONTRACTS AND OPTIONS ON
FUTURES

16
<PAGE>

CONTRACTS; OR (b) INVEST IN PRECIOUS-METALS AND PRECIOUS
MINERALS.

7. Invest 25% or more of the value of the Fund's total assets in the
securities of one or more issuers conducting their principal business
activities in the same industry. This limitation does not apply to
investments or obligations of the U.S. Government or any of its
agencies or instrumentalities.

7.1 THE METALS FUND WILL INVEST 25% OR MORE OF THE VALUE OF THE ITS
TOTAL ASSETS IN THE SECURITIES IN THE METALS-RELATED AND
MINERALS-RELATED INDUSTRIES.

8. Borrow money, except (i) as a temporary measure for extraordinary or
emergency purposes and then only in amounts not in excess of 5% of the
value of the Fund's total assets from a bank or (ii) in an amount up
to one-third of the value of the Fund's total assets, including the
amount borrowed, in order to meet redemption requests without
immediately selling portfolio instruments. This provision is not for
investment leverage but solely to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio instruments would be inconvenient or
disadvantageous.

8.1 THE NOVA FUND AND THE BOND FUND MAY BORROW MONEY, SUBJECT TO THE
CONDITIONS OF PARAGRAPH 8, FOR THE PURPOSE OF INVESTMENT
LEVERAGE.

8.2 THE JUNO FUND MAY BORROW MONEY, SUBJECT TO THE CONDITIONS OF
PARAGRAPH 8, BUT SHALL NOT MAKE PURCHASES WHILE BORROWING IN
EXCESS OF 5% OF THE VALUE OF ITS ASSETS. FOR PURPOSES OF THIS
SUBPARAGRAPH, FUND ASSETS INVESTED IN REVERSE REPURCHASE
AGREEMENTS ARE INCLUDED IN THE AMOUNTS BORROWED.

9. Make short sales of portfolio securities or purchase any portfolio
securities on margin, except for such short-term credits as are
necessary for the clearance of transactions. The deposit or payment
by the Fund of initial or variation margin in connection with futures
or options transactions is not considered to be a securities purchase
on margin. The Fund may engage in short sales if, at the time of the
short sale, the Fund owns or has the right to acquire an equal amount
of the security being sold at no additional cost ("selling against the
box").

9.1 THE URSA FUND, THE ARKTOS FUND, AND THE JUNO FUND MAY ENGAGE IN
SHORT SALES OF PORTFOLIO SECURITIES OR MAINTAIN A SHORT POSITION
IF AT ALL TIMES WHEN A SHORT POSITION IS OPEN (i) THE FUND
MAINTAINS A SEGREGATED ACCOUNT WITH THE FUND'S CUSTODIAN TO COVER
THE SHORT POSITION IN ACCORDANCE WITH THE POSITION OF THE
SECURITIES AND EXCHANGE COMMISSION OR (ii) THE FUND OWNS AN EQUAL
AMOUNT OF SUCH SECURITIES OR SECURITIES CONVERTIBLE INTO OR
EXCHANGEABLE, WITHOUT PAYMENT OF ANY FURTHER CONSIDERATION, FOR
SECURITIES OF THE SAME ISSUE AS, AND EQUAL IN AMOUNT TO, THE
SECURITIES SOLD SHORT.

FUNDAMENTAL POLICIES APPLICABLE TO THE MONEY MARKET FUND
The Money Market Fund shall not:

10. Make loans to others except through the purchase of qualified debt
obligations, loans of portfolio securities and entry into repurchase
agreements.

17
<PAGE>

11. Lend the Money Market Fund's portfolio securities in excess of 15% of
the Money Market Fund's total assets. Any loans of the Money Market
Fund's portfolio securities will be made according to guidelines
established by the Board of Trustees of the Trust, including
maintenance of cash collateral of the borrower equal at all times to
the current market value of the securities loaned.

12. Issue senior securities, except as permitted by the Money Market
Fund's investment objectives and policies.

13. Write or purchase put or call options.

14. Invest in securities of other investment companies, except as these
securities may be acquired as part of a merger, consolidation,
acquisition of assets, or plan of reorganization.

15. Mortgage, pledge, or hypothecate the Money Market Fund's assets except
to secure permitted borrowings. In those cases, the Money Market Fund
may mortgage, pledge, or hypothecate assets having a market value not
exceeding the lesser of the dollar amounts borrowed or 15% of the
value of total assets of the Money Market Fund at the time of the
borrowing.

16. Make short sales of portfolio securities or purchase any portfolio
securities on margin, except for such short-term credits as are
necessary for the clearance of transactions.

FUNDAMENTAL POLICIES OF THE SECTOR FUNDS

A Sector Fund may not:

17. Borrow money in an amount exceeding 33 1/3% of the value of its total
assets, provided that, for purposes of this limitation, investment
strategies which either obligate the Fund to purchase securities or
require that Fund to segregate assets are not considered to be
borrowing. Asset coverage of a least 300% is required for all
borrowing, except where the Fund has borrowed money for temporary
purposes in amounts not exceeding 5% of its total assets. The Fund
will not purchase securities while its borrowing exceed 5% of its
total assets.

18. Make loans if, as a result, more than 33 1/3% of its total assets
would be lent to other parties, except that the Fund may (i) purchase
or hold debt instruments in accordance with its investment objective
and policies; (ii) enter into repurchase agreements; and (iii) lend
its securities.

19. Purchase or sell real estate, physical commodities, or commodities
contracts, except that the Fund may purchase (i) marketable securities
issued by companies which own or invest in real estate (including real
estate investment trusts), commodities, or commodities contracts; and
(ii) commodities contracts relating to financial instruments, such as
financial futures contracts and options on such contracts.

20. Issue senior securities (as defined in the 1940 Act) except as
permitted by rule, regulation or order of the SEC.

21. Act as an underwriter of securities of other issuers except as it may
be deemed an underwriter

18
<PAGE>

in selling a portfolio security.

22. Invest in interests in oil, gas, or other mineral exploration or
development programs and oil, gas or mineral leases.

NON-FUNDAMENTAL POLICIES
The following investment limitations are non-fundamental policies of the Funds
and may be changed with respect to any Fund by the Board of Trustees.

Each Fund may not:

1. Invest in warrants.

2. Invest in real estate limited partnerships.

3. Invest in mineral leases.

Each Sector Fund may not:

4. Pledge, mortgage or hypothecate assets except to secure borrowing
permitted by the Fund's fundamental limitation on borrowing.

5. Invest in companies for the purpose of exercising control.

6. Purchase securities on margin or effect short sales, except that a
Fund may (i) obtain short-term credits as necessary for the clearance
of security transactions; (ii) provide initial and variation margin
payments in connection with transactions involving futures contracts
and options on such contracts; and (iii) make short sales "against the
box" or in compliance with the SEC's position regarding the asset
segregation requirements imposed by Section 18 of the 1940 Act.

7. Invest its assets in securities of any investment company, except as
permitted by the 1940 Act or any rule, regulation or order of the
SEC.

8. Purchase or hold illiquid securities, I.E., securities that cannot be
disposed of for their approximate carrying value in seven days or less
(which term includes repurchase agreements and time deposits maturing
in more than seven days) if, in the aggregate, more than 15% of its
net assets would be invested in illiquid securities.

The foregoing percentages are: (i) based on total assets (except for the
limitation on illiquid securities, which is based on net assets); (ii) will
apply at the time of the purchase of a security; and (iii) shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of a purchase of such security.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Subject to the general supervision by the Trustees, the Advisor is responsible
for decisions to buy and sell securities for each of the Funds, the selection of
brokers and dealers to effect the transactions, and the negotiation

19
<PAGE>

of brokerage commissions, if any. The Advisor expects that the Funds may
execute brokerage or other agency transactions through registered
broker-dealers, for a commission, in conformity with the 1940 Act, the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder.

The Advisor may serve as an investment manager to a number of clients, including
other investment companies. It is the practice of the Advisor to cause purchase
and sale transactions to be allocated among the Funds and others whose assets
the Advisor manages in such manner as the Advisor deems equitable. The main
factors considered by the Advisor in making such allocations among the Funds and
other client accounts of the Advisor are the respective investment objectives,
the relative size of portfolio holdings of the same or comparable securities,
the availability of cash for investment, the size of investment commitments
generally held, and the opinions of the person(s) responsible, if any, for
managing the portfolios of the Funds and the other client accounts.

The policy of each Fund regarding purchases and sales of securities for the
Fund's portfolio is that primary consideration will be given to obtaining the
most favorable prices and efficient executions of transactions. Consistent with
this policy, when securities transactions are effected on a stock exchange, each
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. Each Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Advisor from obtaining a high quality of brokerage and
research services. In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the Advisor relies upon its experience and
knowledge regarding commissions generally charged by various brokers and on its
judgment in evaluating the brokerage and research services received from the
broker effecting the transaction. Such determinations are necessarily
subjective and imprecise, as in most cases an exact dollar value for those
services is not ascertainable.

Purchases and sales of U.S. Government securities are normally transacted
through issuers, underwriters or major dealers in U.S. Government Securities
acting as principals. Such transactions are made on a net basis and do not
involve payment of brokerage commissions. The cost of securities purchased from
an underwriter usually includes a commission paid by the issuer to the
underwriters; transactions with dealers normally reflect the spread between bid
and asked prices.

In seeking to implement a Fund's policies, the Advisor effects transactions with
those brokers and dealers who the Advisor believes provide the most favorable
prices and are capable of providing efficient executions. If the Advisor
believes such prices and executions are obtainable from more than one broker or
dealer, the Advisor may give consideration to placing portfolio transactions
with those brokers and dealers who also furnish research and other services to
the Fund or the Advisor. Such services may include, but are not limited to, any
one or more of the following: information as to the availability of securities
for purchase or sale; statistical or factual information or opinions pertaining
to investment; wire services; and appraisals or evaluations of portfolio
securities. If the broker-dealer providing these additional services is acting
as a principal for its own account, no commissions would be payable. If the
broker-dealer is not a principal, a higher commission may be justified, at the
determination of the Advisor, for the additional services.

The information and services received by the Advisor from brokers and dealers
may be of benefit to the Advisor in the management of accounts of some of the
Advisor's other clients and may not in all cases benefit a Fund directly. While
the receipt of such information and services is useful in varying degrees and
would generally reduce the amount of research or services otherwise performed by
the Advisor and thereby reduce the Advisor's expenses, this information and
these services are of indeterminable value and the management fee paid to the
Advisor is not reduced by any amount that may be attributable to the value of
such information and services.

For the fiscal year ended December 31, 1997, the Funds' predecessor paid the
following brokerage commissions:

Metals Fund $19,733

20
<PAGE>

MANAGEMENT OF THE TRUST

The Trustees are responsible for the general supervision of the Trust's
business. The day-to-day operations of the Trust are the responsibilities of
the Trust's officers. The names and addresses (and ages) of the Trustees and
the officers of the Trust and the officers of the Advisor, together with
information as to their principal business occupations during the past five
years, are set forth below. Fees and expenses for non-interested Trustees will
be paid by the Trust.

NAME; ADDRESS; AGE POSITION HELD PRINCIPAL OCCUPATION(S) DURING THE PAST 5 YEARS
WITH THE FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>

*ALBERT P. VIRAGH, JR. (56) Chairman of the Board of Chairman of the Board, President and Treasurer of PADCO
6116 Executive Boulevard Trustees and President of the Advisors, Inc., investment adviser to the Trust, 1993
Suite 400 Trust to present; Chairman of the Board, President, and
Rockville, Maryland 20852 Treasurer of PADCO Service Company, Inc., shareholder
and transfer agent servicer to the Trust, 1993 to
present; Chairman of the Board of Managers of The Rydex
Advisor Variable Annuity Account (the "Separate
Account"), a separate account of Great American Reserve
Insurance Company, 1996 to present; Chairman of the
Board, President, and Treasurer of PADCO Advisors II,
Inc., investment adviser to the Separate Account, 1996
to present; Chairman of the Board, President, and
Treasurer of PADCO Financial Services, Inc., a
registered broker-dealer firm, 1996 to present; Vice
President of Rushmore Investment Advisors Ltd., a
registered investment adviser, 1985 to 1993.
- ----------------------------------------------------------------------------------------------------------------------------------

COREY A. COLEHOUR (52) Trustee of the Trust Manager of the Separate Account, 1996 to present; Senior
6116 Executive Boulevard Vice President of Marketing of Schield Management
Suite 400 Company, a registered investment adviser, 1985 to
Rockville, Maryland 20852 present.
- ----------------------------------------------------------------------------------------------------------------------------------

J.KENNETH DALTON (56) Trustee of the Trust Manager of the Separate Account, 1996 to present;
6116 Executive Boulevard Mortgage Banking Consultant and Investor, The Dalton
Suite 400 Group, April 1995 to present; President, CRAM Mortgage
Rockville, Maryland 20852 Group, Inc. 1966 to April 1995.
- ----------------------------------------------------------------------------------------------------------------------------------

JOHN O. DEMARET (57) Trustee of the Trust Manager of the Separate Account, 1997 to present;
6116 Executive Boulevard Founder and Chief Executive Officer, Health Cost
Suite 400 Controls America, Chicago, Illinois, 1987 to 1996; sole
Rockville, Maryland 20852 practitioner, Chicago, Illinois, 1984 to 1987; General
Counsel for the Chicago Transit Authority, 1981 to 1984;
Senior Partner, O'Halloran, LaVarre & Demaret,
Northbrook, Illinois, 1978 to 1981.
- ----------------------------------------------------------------------------------------------------------------------------------

21
<PAGE>

*L. GREGORY GLOECKNER (45) Trustee of the Trust Manager of the Separate Account; Senior Vice President,
11815 North Pennsylvania Street Conseco, Inc., October 1994 to the present; Vice
Carmel, Indiana 46032 President, Continuum, August to October 1994; Vice
President, Variable Product Administrator, Monarch Life
Insurance Company and First Variable Life Company, 1993
to 1994; self-employed consultant from 1991 to 1993;
and Vice President, Beneficial Standard Life Insurance
Company, 1989 to 1991.
- ----------------------------------------------------------------------------------------------------------------------------------

PATRICK T. McCARVILLE (55) Trustee of the Trust Manager of the Separate Account, 1997 to present;
6116 Executive Boulevard, Founder and Chief Executive Officer, Par Industries,
Suite 400 Inc., Northbrook, Illinois, 1977 to present; President
Rockville, Maryland 20852 and Chief Executive Officer, American Health Resources,
Northbrook, Illinois, 1984 to 1986.
- ----------------------------------------------------------------------------------------------------------------------------------

ROGER SOMERS (53) Trustee of the Trust Manager of the Separate Account, 1996 to present;
6116 Executive Boulevard, President, Arrow Limousine, 1963 to present.
Suite 400
Rockville, Maryland 20852
- ----------------------------------------------------------------------------------------------------------------------------------

ROBERT M. STEELE (40) Secretary and Vice President Vice President of PADCO Advisors, Inc., investment
6116 Executive Boulevard, of the Trust adviser to the Trust, 1994 to present; Secretary and
Suite 400 Vice President of the Separate Account, 1996 to present;
Rockville, Maryland 20852 Vice President of PADCO Advisors II, Inc., investment
adviser to the Separate Account, 1996 to present; Vice
President of The Boston Company, Inc., an institutional
money management firm, 1987 to 1994.
- ----------------------------------------------------------------------------------------------------------------------------------

CARL G. VERBONCOEUR (45) Vice President of Operations Vice President of Operations of the Separate Account,
6116 Executive Boulevard, of the Trust 1997 to present; Senior Vice President, Crestar Bank,
Suite 400 1995 to 1997; Senior Vice President, Crestar Asset
Rockville, Maryland 20852 Management Company, a registered investment adviser,
1993 to 1995; Vice President Perpetual Savings Bank,
1987 to 1993.
- ----------------------------------------------------------------------------------------------------------------------------------

MICHAEL P. BYRUM (28) Vice President and Vice President of PADCO Advisors, Inc. since 1998;
6116 Executive Boulevard, Assistant Secretary of the Employee and senior portfolio manager of PADCO Advisors,
Suite 400 Trust Inc., 1993 to 1998; portfolio manager of The Rydex OTC
Rockville, Maryland 20852 Fund (since 1997), The Rydex Ursa Fund (since 1997)
and the Rydex Arktos Fund (since 1998), each a series of
the Trust; Assistant Secretary of the Separate Account,
1996 to present; Employee of PADCO Advisors II Inc.,
investment adviser to the Separate Account; Investment
Representative, Money Management Associates, a registered
investment adviser, 1992 to 1993.
- ----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

- --------------
* This trustee is deemed to be an "interested person" of the Trust, within
the meaning of Section 2(a)(19) of the 1940 Act, inasmuch as this person
is affiliated with the Advisor or the sponsor of the Separate Account, as
described herein.

22
<PAGE>

The aggregate compensation paid by the Separate Account to each of its Managers
serving during the fiscal year ended March 31, 1998, is set forth in the table
below. The compensation arrangements between the Trust and its Trustees will be
the same.

- -----------------------------------------------------------------------------
Aggregate Pension or Estimated Annual
Name of Person, Compensation Retirement Benefits Benefits Upon
Position From Trust Accrued as Part of Retirement
Trust's Expenses
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Albert P. Viragh, $0 $0 $0
Jr.*, CHAIRMAN AND
PRESIDENT
- -----------------------------------------------------------------------------
Corey A. Colehour, $6,000 $0 $0
TRUSTEE
- -----------------------------------------------------------------------------
J. Kenneth Dalton, $6,000 $0 $0
TRUSTEE
- -----------------------------------------------------------------------------
Roger Somers, $6,000 $0 $0
TRUSTEE
- -----------------------------------------------------------------------------
John O. Demaret, $1,500** $0 $0
TRUSTEE
- -----------------------------------------------------------------------------
Patrick T. $1,500** $0 $0
McCarville, TRUSTEE
- -----------------------------------------------------------------------------
L. Gregory $0 $0 $0
Gloeckner*, TRUSTEE
- -----------------------------------------------------------------------------
</TABLE>
*Denotes an "interested person" of the Trust.
**Messrs. Demaret and McCarville were elected to the Board of Trustees in
December 1997.

As of the date of this Statement of Additional Information, the Trustees and the
officers of the Trust, as a group, owned, of record and beneficially, less than
1.0% of the outstanding shares of each Fund.

THE ADVISORY AGREEMENT
Under an investment advisory agreement with the Advisor, dated ____________,
1998, the Advisor serves as the investment adviser for each series of the Trust
and provides investment advice to the Funds and oversees the day-to-day
operations of the Funds, subject to direction and control by the Trustees and
the officers of the Trust. As of ___________, 1998, net Trust assets under
management of the Advisor were approximately $____ billion. Pursuant to the
advisory agreement with the Advisor, the Funds pay the Advisor the following
fees at an annual rate based on the average daily net assets for each respective
Fund, as set forth in the table below. The advisory fee contractual rate paid
to the Advisor by the Funds, respectively, is the same as was paid by the Rydex
Subaccounts, respectively. The aggregate advisory fees paid to the Advisor for
management of the Rydex Subaccounts since inception of the Rydex Subaccounts
is also set forth in the table below.

<TABLE>
<CAPTION>
ADVISORY FEES PAID (NET OF
FUND/SUBACCOUNT REIMBURSEMENTS)
ANNUAL ADVISORY 1997 1998*
FEE CONTRACTUAL
RATE
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Nova Subaccount 0.75% $0 $14,697
- -----------------------------------------------------------------------------
Ursa Subaccount 0.90% $0 $ 9,753
- -----------------------------------------------------------------------------
OTC Subaccount 0.75% $0 $11,599
- -----------------------------------------------------------------------------
Metals Subaccount 0.75% $0 $ 1,193
- -----------------------------------------------------------------------------
Bond Subaccount 0.50% $0 $ 188
- -----------------------------------------------------------------------------
</TABLE>

23
<PAGE>

<TABLE>
<CAPTION>
ADVISORY FEES PAID (NET OF
FUND/SUBACCOUNT REIMBURSEMENTS)
ANNUAL ADVISORY 1997 1998*
FEE CONTRACTUAL
RATE
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Juno Subaccount 0.90% $0 $ 275
- -----------------------------------------------------------------------------
Money Market Subaccount 0.50% $0 $2,298
- -----------------------------------------------------------------------------
Sector Funds(1) 0.85% N/A N/A
- -----------------------------------------------------------------------------
Arktos Fund(1) 0.90% N/A N/A
- -----------------------------------------------------------------------------
</TABLE>
*For period from January 1, 1998 to June 30, 1998.
(1)There were no Sector Fund or Arktos Fund equivalents among the Rydex
Subaccounts.

The Advisor manages the investment and the reinvestment of the assets of each of
the Funds, in accordance with the investment objectives, policies, and
limitations of the Fund, subject to the general supervision and control of the
Trustees and the officers of the Trust. The Advisor bears all costs associated
with providing these advisory services and the expenses of the Trustees of the
Trust who are affiliated with or interested persons of the Advisor. The
Advisor, from its own resources, including profits from advisory fees received
from the Funds, provided such fees are legitimate and not excessive, may make
payments to broker-dealers and other financial institutions for their expenses
in connection with the distribution of Fund shares, and otherwise currently pay
all distribution costs for Fund shares.

The Advisor, which has its office at 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852, was incorporated in the State of Maryland on July 5,
1994. Albert P. Viragh, Jr., the Chairman of the Board of Trustees and the
President of the Advisor, owns a controlling interest in the Advisor.

THE SERVICE AGREEMENT
General administrative, shareholder, dividend disbursement, transfer agent, and
registrar services are provided to the Trust and the Funds by PADCO Service
Company, Inc., 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852
(the "Servicer"), subject to the general supervision and control of the Trustees
and the officers of the Trust, pursuant to a service agreement between the Trust
and the Servicer, dated ___________, 1998. The Servicer is wholly-owned by
Albert P. Viragh, Jr., who is the Chairman of the Board and the President of the
Trust and the sole controlling person and majority owner of the Advisor.

Under the service agreement, the Servicer provides the Trust and each Fund with
all required general administrative services, including, without limitation,
office space, equipment, and personnel; clerical and general back office
services; bookkeeping, internal accounting, and secretarial services; the
determination of net asset values; and the preparation and filing of all
reports, registration statements, proxy statements, and all other materials
required to be filed or furnished by the Trust and each Fund under Federal and
state securities laws. The Servicer also maintains the shareholder account
records for each Fund, distributes dividends and distributions payable by each
Fund, and produces statements with respect to account activity for each Fund and
each Fund's shareholders. The Servicer pays all fees and expenses that are
directly related to the services provided by the Servicer to each Fund; each
Fund reimburses the Servicer for all fees and expenses incurred by the Servicer
which are not directly related to the services the Servicer provides to the Fund
under the service agreement. The Servicer may compensate third parties for
providing certain shareholder services on behalf of the Servicer.

The service fee contractual rate paid to the Sevicer by the Funds, respectively,
is the same as was paid by the Rydex Subaccounts, respectively, and is set forth
in the table below. The aggregate service fees paid to the

24
<PAGE>

Servicer for administration of the Rydex Subaccounts since inception of the
Rydex Subaccounts (May 7, 1997) is also set forth in the table below.

<TABLE>
<CAPTION>
SERVICE FEES PAID
ANNUAL SERVICE (NET OF REIMBURSEMENTS)
FUND FEE RATE 1997 1998*
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Nova Subaccount 0.25% $0 $16,255
- ----------------------------------------------------------------------------
Ursa Subaccount 0.25% $0 $ 7,376
- ----------------------------------------------------------------------------
OTC Subaccount 0.20% $0 $ 6,653
- ----------------------------------------------------------------------------
Metals Subaccount 0.20% $0 $ 1,113
- ----------------------------------------------------------------------------
Bond Subaccount 0.20% $0 $ 215
- ----------------------------------------------------------------------------
Juno Subaccount 0.25% $0 $ 269
- ----------------------------------------------------------------------------
Money Market Subaccount 0.20% $0 $ 920
- ----------------------------------------------------------------------------
Arktos Fund(1) 0.25% N/A N/A
- ----------------------------------------------------------------------------
Sector Funds(1) 0.20% N/A N/A
</TABLE>
*For period from January 1, 1998 to June 30, 1998.
(1)There were no Sector Fund or Arktos Fund equivalents among the Rydex
Subaccounts.

COSTS AND EXPENSES
Each Fund bears all expenses of its operations other than those assumed by the
Advisor or the Servicer. Fund expenses include: the management fee; the
servicing fee (including administrative, transfer agent, and shareholder
servicing fees); custodian and accounting fees and expenses; legal and auditing
fees; securities valuation expenses; fidelity bonds and other insurance
premiums; expenses of preparing and printing prospectuses, confirmations, proxy
statements, and shareholder reports and notices; registration fees and expenses;
proxy and annual meeting expenses, if any; all Federal, state, and local taxes
(including, without limitation, stamp, excise, income, and franchise taxes);
organizational costs; non-interested Trustees' fees and expenses; the costs and
expenses of redeeming shares of the Fund; fees and expenses paid to any
securities pricing organization; dues and expenses associated with membership in
any mutual fund organization; and costs for incoming telephone WATTS lines. In
addition, each of the Funds pays an equal portion of the Trustee fees and
expenses for attendance at Trustee meetings for the Trustees of the Trust who
are not affiliated with or interested persons of the Advisor.

PRINCIPAL HOLDERS OF SECURITIES

As of September 1, 1998, to the knowledge of the Trust, there were no beneficial
owners of 5% or more of the shares of the Funds. Upon commencement of
operation, the Trust expects Great American to become a beneficial owner of more
than 5% of the shares of the Funds.

DETERMINATION OF NET ASSET VALUE

The net asset value of a Fund serves as the basis for the purchase and
redemption price of that Fund's shares. The net asset value per share of a Fund
is calculated by dividing the market value of the Fund's securities plus the

25
<PAGE>

values of its other assets, less all liabilities, by the number of outstanding
shares of the Fund. If market quotations are not readily available, a security
will be valued at fair value by the Board of Trustees or by the Advisor using
methods established or ratified by the Board of Trustees.

For purposes of determining net asset value per share of a Fund, options and
futures contracts will be valued 15 minutes after the 4:00 P.M., Eastern Time,
close of regular trading on the NYSE, except that futures contracts traded on
the Chicago Board of Trade ("CBOT") will be valued at 3:00 P.M., Eastern Time,
the close of trading of that exchange. Options on securities and indices
purchased by a Fund generally are valued at their last bid price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter ("OTC") market, the average of the last bid price as obtained
from two or more dealers unless there is only one dealer, in which case that
dealer's price is used. The value of a futures contract equals the unrealized
gain or loss on the contract settlement price for a like contract acquired on
the day on which the futures contract is being valued. The value of options on
futures contracts is determined based upon the current settlement price for a
like option acquired on the day on which the option is being valued. A
settlement price may not be used for the foregoing purposes if the market makes
a limit move with respect to a particular commodity.

On days when the CBOT is closed during its usual business hours, but the shares
of the Bond Fund or Juno Fund have been purchased, redeemed, and/or exchanged,
the portfolio securities held by the Bond Fund or Juno Fund which are traded on
the CBOT are valued at the earlier of (i)the time of the execution of the last
trade of the day for the Bond Fund or Juno Fund in those CBOT-traded portfolio
securities and (ii)the time of the close of the CBOT Evening Session. On days
when the CBOT is closed during its usual business hours and there is no need for
the Bond Fund or Juno Fund to execute trades on the CBOT, the value of the
CBOT-traded portfolio securities held by the Bond Fund or Juno Fund will be the
mean of the bid and asked prices for those CBOT-traded portfolio securities at
the open of the CBOT Evening Session.

OTC securities held by a Fund shall be valued at the last sales price or, if no
sales price is reported, the mean of the last bid and asked price is used. The
portfolio securities of a Fund that are listed on national exchanges are taken
at the last sales price of such securities on such exchange; if no sales price
is reported, the mean of the last bid and asked price is used. For valuation
purposes, all assets and liabilities initially expressed in foreign currency
values will be converted into U.S. dollar values at the mean between the bid and
the offered quotations of such currencies against U.S. dollars as last quoted by
any recognized dealer. If such quotations are not available, the rate of
exchange will be determined in good faith by the Advisor based on guidelines
adopted by the Trustees. Dividend income and other distributions are recorded
on the ex-dividend date, except for certain dividends from foreign securities
which are recorded as soon as the Trust is informed after the ex-dividend date.

Illiquid securities, securities for which reliable quotations or pricing
services are not readily available, and all other assets will be valued at their
respective fair value as determined in good faith by, or under procedures
established by, the Trustees, which procedures may include the delegation of
certain responsibilities regarding valuation to the Advisor or the officers of
the Trust. The officers of the Trust report, as necessary, to the Trustees
regarding portfolio valuation determination. The Trustees, from time to time,
will review these methods of valuation and will recommend changes which may be
necessary to assure that the investments of the Funds are valued at fair value.

AMORTIZED COST METHOD
The Money Market Fund will utilize the amortized cost method in valuing its
portfolio securities for purposes of determining the net asset value of its
shares even though the portfolio securities may increase or decrease in market
value, generally, in connection with changes in interest rates. The amortized
cost method of valuation involves

26
<PAGE>

valuing a security at its cost adjusted by a constant amortization to maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument while this method provides certainty
in valuation, this method may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Money Market
Fund would receive if this Fund sold the instrument. During such periods, the
yield to investors in the Money Market Fund may differ somewhat from that
obtained in a similar company which uses mark-to-market values for all its
portfolio securities. For example, if the use of amortized cost resulted in a
lower (higher) aggregate portfolio value on a particular day, a prospective
investor in the Money Market Fund would be able to obtain a somewhat higher
(lower) yield than would result from investment in such a similar company and
existing investors would receive less (more) investment income. The purpose of
this method of calculation is to facilitate the maintenance of a constant net
asset value per share of $1.00.

The Money Market Fund's use of the amortized cost method is permitted pursuant
to Rule 2a-7 under the 1940 Act (the "Rule"). The Rule requires that the Money
Market Fund limit its investments to U.S. dollar-denominated instruments that
meet the Rule's quality, maturity and diversification requirements. The Rule
also requires the Money Market Fund to maintain a dollar-weighted average
portfolio maturity of not more than ninety days and precludes the purchase of
any instrument with a remaining maturity of more than thirteen months.

The Money Market Fund may only purchase Eligible Securities. Eligible
Securities are securities which: (a) have remaining maturities of thirteen
months or less; (b) either (i) are rated in the two highest short-term rating
categories by any two nationally-recognized statistical rating organizations
("NSROs") that have issued a short-term rating with respect to the security or
class of debt obligations of the issuer, or (ii) if only one NSRO has issued a
short-term rating with respect to the security, then by that NSRO; (c) were
long-term securities at the time of issuance whose issuers have outstanding
short-term debt obligations which are comparable in priority and security and
has a ratings as specified in (b) above; or (d) if no rating is assigned by any
NSRO as provided in (b) and (c) above, the unrated securities are determined by
the Trustees to be of comparable quality to any rated securities.

As permitted by the Rule, the Trustees have delegated to the Advisor, subject to
the Trustees' oversight pursuant to guidelines and procedures adopted by the
Trustees, the authority to determine which securities present minimal credit
risks and which unrated securities are comparable in quality to rated
securities.

If the Trustees determine that it is no longer in the best interests of the
Money Market Fund and its shareholders to maintain a stable price of $1.00 per
share, or if the Trustees believe that maintaining such price no longer reflects
a market-based net asset value per share, the Trustees have the right to change
from an amortized cost basis of valuation to valuation based on market
quotations. The Money Market Fund will notify shareholders of any such change.

PERFORMANCE INFORMATION

From time to time, each of the Funds (other than the Money Market Fund) may
include the Fund's total return in advertisements or reports to shareholders or
prospective shareholders. Quotations of average annual total return for a Fund
will be expressed in terms of the average annual compounded rate of return on a
hypothetical investment in the Fund over a period of at least one, five, and ten
years (up to the life of the Fund) (the ending date of the period will be
stated). Total return of a Fund is calculated from two factors: the amount of
dividends earned by each Fund share and by the increase or decrease in value of
the Fund's share price. See "Calculation of Return Quotations."

27
<PAGE>

Performance information for each of the Funds contained in reports to
shareholders or prospective shareholders, advertisements, and other promotional
literature may be compared to the record of various unmanaged indexes.
Performance information for the Nova Fund, the Ursa Fund, and the Metals Fund
may be compared to various unmanaged indexes, including, but not limited to, the
S&P 500 Index or the Dow Jones Industrial Average. Performance information for
the Metals Fund also may be compared to its current benchmark, the XAU Index.
Performance information for the OTC and Arktos Funds may be compared to various
unmanaged indexes, including, but not limited to, its current benchmark, the
NASDAQ 100 Index-TM-, and the NASDAQ Composite Index-TM-. The OTC Fund has the
ability to invest in securities not included in the NASDAQ 100 Index-TM- or the
NASDAQ Composite Index-TM-, and the OTC Fund's investment portfolio may or may
not be similar in composition to NASDAQ 100 Index-TM- or the NASDAQ Composite
Index-TM-. Performance information for the Bond Fund and the Juno Fund may be
compared to various unmanaged indexes, including, but not limited to, the
Shearson Lehman Government (LT) Index.

Such unmanaged indexes may assume the reinvestment of dividends, but generally
do not reflect deductions for operating costs and expenses. In addition, a
Fund's total return may be compared to the performance of broad groups of
comparable mutual funds with similar investment goals, as such performance is
tracked and published by such independent organizations as Lipper Analytical
Services, Inc. ("Lipper"), and CDA Investment Technologies, Inc., among others,
when Lipper's tracking results are used, the Fund will be compared to Lipper's
appropriate fund category, that is, by fund objective and portfolio holdings.
Performance figures are based on historical results and are not intended to
indicate future performance.

In addition, rankings, ratings, and comparisons of investment performance and/or
assessments of the quality of shareholder service appear in numerous financial
publications such as MONEY, FORBES, KIPLINGER'S MAGAZINE, PERSONAL INVESTOR,
MORNINGSTAR, INC., and similar sources.

CALCULATION OF RETURN QUOTATIONS

For purposes of quoting and comparing the performance of a Fund (other than the
Money Market Fund) to that of other mutual funds and to other relevant market
indexes in advertisements or in reports to shareholders, performance for the
Fund may be stated in terms of total return. Under the rules of the SEC ("SEC
Rules"), Funds advertising performance must include total return quotes
calculated according to the following formula:

n
P(1+T) = ERV

Where: P = a hypothetical initial payment of $1,000;

T = average annual total return;

n = number of years (1, 5 or 10); and

ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of the 1, 5 or 10 year
periods, at the end of the 1, 5, or 10 year periods
(or fractional portion thereof).

Under the foregoing formula, the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication, and will cover 1, 5, and
10 year periods or a shorter period dating from the effectiveness of the
Registration Statement of

28
<PAGE>

the Trust In calculating the ending redeemable value, all dividends and
distributions by a Fund are assumed to have been reinvested at net asset value
as described in the Trust's Prospectus on the reinvestment dates during the
period. Total return, or 'T' in the formula above, is computed by finding the
average annual compounded rates of return over the 1, 5, and 10 year periods (or
fractional portion thereof) that would equate the initial amount invested to the
ending redeemable value.

For the period from the respective commencement of operations of certain of the
Subaccounts to December 31, 1997, the average annual compounded rate of return
of the respective Funds (other than the Money Market Fund), assuming the
reinvestment of all dividends and distributions, was as follows in the table
below. The predecessor Rydex Subaccounts were subject to expenses to which the
Funds will not necessarily be subject. Accordingly, the performance information
below has been adjusted by applying the anticipated total expense ratio for each
Fund, respectively.

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM THE
COMMENCEMENT
OF OPERATIONS(1) TO
DECEMBER 31, 1997
-----------------
<S> <C>
Nova Subaccount 22.11%
Ursa Subaccount -13.48%
OTC Subaccount 6.54%
Precious Metals Subaccount -29.85%
U.S. Government Bond Subaccount 9.84%
Money Market Subaccount 3.19%
</TABLE>

_____________________________
(1)The Nova Subaccount commenced operations on May 7, 1997. The Ursa
Subaccount commenced continuous operations on June 10, 1997. The OTC
Subaccount commenced operations on May 7, 1997. The Precious Metals
Subaccount commenced operations on May 29, 1997. The U.S. Government Bond
Subaccount commenced continuous operations on August 18, 1997. The Money
Market Subaccount commenced operations on May 7, 1997. The Juno Subaccount
had not commenced continous operations as of December 31, 1997.

INFORMATION ON COMPUTATION OF YIELD

THE BOND FUND
In addition to the total return quotations discussed above, the Bond Fund also
may advertise its yield based on a thirty-day (or one month) period ended on the
date of the most recent balance sheet included in the Trust's Registration
Statement, computed by dividing the net investment income per share of the Fund
earned during the period by the maximum offering price per Fund share on the
last day of the period, according to the following formula:

6
YIELD = 2( a-b + 1) - 1
---
cd

Where: a = dividends and interest earned during the period;

b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares outstanding during
the period that were

29
<PAGE>

entitled to receive dividends; and

d = the maximum offering price per share on the last day of
the period.

Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (i) computing the yield to maturity of each obligation
held by the Bond Fund based on the market value of the obligation (including
actual accrued interest) at the close of business on the last day of each month,
or, with respect to obligations purchased during the month, the purchase price
(plus actual accrued interest), (ii) dividing that figure by 360 and multiplying
the quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation that is in the Bond Fund's portfolio (assuming a month of thirty
days), and (iii) computing the total of the interest earned on all debt
obligations and all dividends accrued on all equity securities during the
thirty-day or one month period. In computing dividends accrued, dividend income
is recognized by accruing 1/360 of the stated dividend rate of a security each
day that the security is in the Fund's portfolio. Undeclared earned income,
computed in accordance with generally accepted accounting principles, may be
subtracted from the maximum offering price calculation required pursuant to "d"
above.

The Bond Fund from time to time may also advertise its yield based on a
thirty-day period ending on a date other than the most recent balance sheet
included in the Trust's Registration Statement, computed in accordance with the
yield formula described above, as adjusted to conform with the differing period
for which the yield computation is based.

Any quotation of performance stated in terms of yield (whether based on a
thirty-day or one month period) will be given no greater prominence than the
information prescribed under SEC Rules. In addition, all advertisements
containing performance data of any kind will include a legend disclosing that
such performance data represents past performance and that the investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than the original cost of such
shares.

THE MONEY MARKET FUND
The Money Market Fund's annualized current yield, as may be quoted from time to
time in advertisements and other communications to shareholders and potential
investors, is computed by determining, for a stated seven-day period, the net
change, exclusive of capital changes and including the value of additional
shares purchased with dividends and any dividends declared therefrom (which
reflect deductions of all expenses of the Money Market Fund such as management
fees), in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, and dividing the difference by the
value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by 365 divided by 7.

The Money Market Fund's annualized effective yield, as may be quoted from time
to time in advertisements and other communications to shareholders and potential
investors, is computed by determining (for the same stated seven-day period as
the current yield) the net change, exclusive of capital changes and including
the value of additional shares purchased with dividends and any dividends
declared therefrom (which reflect deductions of all expenses of the Money Market
Fund such as management fees), in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period, and
dividing the difference by the value of the account at the beginning of the base
period to obtain the base period return, and then compounding the base period
return by adding 1, raising the sum to a power equal to 365 divided by 7, and
subtracting 1 from the result.

The yields quoted in any advertisement or other communication should not be
considered a representation of the yields of the Money Market Fund in the future
since the yield is not fixed. Actual yields will depend not only on

30
<PAGE>

the type, quality, and maturities of the investments held by the Money Market
Fund and changes in interest rates on such investments, but also on changes in
the Money Market Fund's expenses during the period.

Yield information may be useful in reviewing the performance of the Money Market
Fund and for providing a basis for comparison with other investment
alternatives. However, unlike bank deposits or other investments which
typically pay a fixed yield for a stated period of time, the Money Market Fund's
yield fluctuates.

PURCHASE AND REDEMPTION OF SHARES

SUSPENSION OF THE RIGHT OF REDEMPTION
The Funds may suspend the right of redemption or the date of payment: (i) for
any period during which the NYSE, the Federal Reserve Bank of New York, the
NASDAQ, the Chicago Mercantile Exchange ("CME"), the CBOT, or any other
exchange, as appropriate, is closed (other than customary weekend or holiday
closings), or trading on the NYSE, the NASDAQ, the CME, the CBOT, or any other
exchange, as appropriate, is restricted; (ii) for any period during which an
emergency exists so that sales of a Fund's investments or the determination of
its NAV is not reasonably practicable; or (iii) for such other periods as the
SEC may permit for the protection of a Fund's investors.

HOLIDAYS
The NYSE, the Federal Reserve Bank of New York, the NASDAQ, the CME, the CBOT,
and other U.S. exchanges are closed on weekends and on the following holidays:
(i) New Year's Day, Martin Luther King Jr.'s Birthday, President's Day, Good
Friday, Memorial Day, July Fourth, Labor Day, Columbus Day, Thanksgiving Day,
and Christmas Day; and (ii) the preceding Friday if any of these holidays falls
on a Saturday, or the subsequent Monday if any of these holidays falls on a
Sunday. Although the Trust expects the same holiday schedules to be observed in
the future, each of the aforementioned exchanges may modify its holiday schedule
at any time.

REDEMPTIONS IN-KIND
The Trust intends to pay your redemption proceeds in cash. However, under
unusual conditions that make the payment in cash unwise (and for the protection
of the remaining shareholders of the Fund) the Trust reserves the right to pay
all, or part, of your redemption proceeds in liquid securities with a market
value equal to the redemption price (redemption in-kind). Although it is
highly unlikely that your shares would ever actually be redeemed in kind, you
would probably have to pay brokerage costs to sell the securities distributed to
you.

DIVIDENDS, DISTRIBUTIONS, AND TAXES

DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income and any distributions of net realized
capital gains from each of the Funds will be distributed as described in the
Trust's Prospectus under "Dividends and Distributions." All such distributions
of a Fund normally automatically will be reinvested without charge in additional
shares of the same Fund.

The Money Market Fund intends to declare dividends daily from net investment
income (and net short-term capital gains, if any) and distribute such dividends
monthly. Net income, for dividend purposes, includes accrued interest and
accretion of original issue and market discount, plus or minus any short-term
gains or losses realized on sales of portfolio securities, less the amortization
of market premium and the estimated expenses of the Money Market Fund. Net
income will be calculated immediately prior to the determination of net asset
value per share of the

31
<PAGE>

Money Market Fund.

The Trustees may revise the dividend policy, or postpone the payment of
dividends, if the Money Market Fund should have or anticipate any large
unexpected expense, loss, or fluctuation in net assets which, in the opinion of
the Trustees, might have a significant adverse effect on shareholders of the
Money Market Fund. On occasion, in order to maintain a constant $1.00 per share
net asset value for the Money Market Fund, the Trustees may direct that the
number of outstanding shares of the Money Market Fund be reduced in each
shareholder's account.

With respect to the investment by the Bond Fund in U.S. Treasury zero coupon
bonds, a portion of the difference between the issue price of zero coupon
securities and the face value of such securities (the "original issue discount")
is considered to be income to the Bond Fund each year, even though the Bond Fund
will not receive cash interest payments from these securities. This original
issue discount (imputed income) will comprise a part of the investment company
taxable income of the Bond Fund which must be distributed to shareholders of the
Bond Fund in order to maintain the qualification of the Bond Fund as a regulated
investment company (a "RIC") under Subchapter M of the U.S. Internal Revenue
Code of 1986, as amended (the "Code"), as described immediately below under
"Regulated Investment Company Status," and to avoid Federal income tax at the
level of the Bond Fund.

REGULATED INVESTMENT COMPANY STATUS
As a RIC, a Fund would not be subject to Federal income taxes on the net
investment income and capital gains that the Fund distributes to the Fund's
shareholders.

Each of the Funds will seek to qualify for treatment as a RIC under the Code.
Provided that a Fund (i) is a RIC and (ii) distributes at least 90% of the
Fund's net investment income (including, for this purpose, net realized
short-term capital gains), the Fund itself will not be subject to Federal income
taxes to the extent the Fund's net investment income and the Fund's net realized
long- and short-term capital gains, if any, are distributed to the Fund's
shareholders. To avoid an excise tax on its undistributed income, each Fund
generally must distribute at least 98% of its income, including its net
long-term capital gains. One of several requirements for RIC qualification is
that the Fund must receive at least 90% of the Fund's gross income each year
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of securities or foreign currencies, or other
income derived with respect to the Fund's investments in stock, securities, and
foreign currencies (the "90% Test"). Income from investments in precious metals
and in precious minerals will not qualify as gross income from "securities" for
purposes of the 90% Test. The Metals Fund, therefore, intends to restrict its
investment in precious metals and in precious minerals to avoid a violation of
the 90% Test.

If a fund were to fail to qualify as an RIC for one or more taxable years, the
Fund could then qualify (or re-qualify) as an RIC for a subsequent taxable year
only if the Fund had distributed to the Fund's shareholders a taxable dividend
equal to the full amount of any earnings or profits (less the interest charge
mentioned below, if applicable) attributable to such period. The fund might
also be required to pay to the U.S. Internal Revenue Service (the "IRS")
interest on 50% of such accumulated earnings and profits. In addition, pursuant
to the Code and an interpretative notice issued by the IRS, if the Fund should
fail to qualify as an RIC and should thereafter seek to re-qualify as an RIC,
the Fund may be subject to tax on the excess (if any) of the fair market of the
Fund's assets over the Fund's basis in such assets, as of the day immediately
before the first taxable year for which the Fund seeks to re-qualify as an RIC.

If a fund determines that the fund will not qualify as an RIC under Subchapter M
of the Code, the Fund will establish procedures to reflect the anticipated tax
liability in the Fund's net asset value.

32
<PAGE>

SECTION 817(h) DIVERSIFICATION
Section 817(h) of the Code requires that the assets of each Fund be adequately
diversified so that insurance companies that invest in their shares, and not
variable annuity contract owners, are considered the owners of the shares for
federal income tax purposes. Each Fund ordinarily must satisfy the
diversification requirements within one year after contract owner funds are
first allocated to the particular Fund. In order to meet the diversification
requirements of regulations issued under Section 817(h), each Fund will meet the
following test: no more than 55% of the assets will be invested in any one
investment; no more than 70% of the assets will be invested in any two
investments; no more than 80% of the assets will be invested in any three
investments; and no more than 90% will be invested in any four investments.
Each Fund must meet the above diversification requirements within 30 days of the
end of each calendar quarter.

SPECIAL CONSIDERATIONS APPLICABLE TO THE METALS FUND AND THE SECTOR FUNDS
In general, with respect to the Metals Fund and the Sector Funds, gains from
"foreign currencies" and from foreign currency options, foreign currency
futures, and forward foreign exchange contracts ("forward contracts") relating
to investments in stock, securities, or foreign currencies will be qualifying
income for purposes of determining whether the Fund qualifies as a RIC. It is
currently unclear, however, who will be treated as the issuer of a foreign
currency instrument or how foreign currency options, futures, or forward
contracts will be valued for purposes of the RIC diversification requirements
applicable to the Fund.

Under the Code, special rules are provided for certain transactions in a foreign
currency other than the taxpayer's functional currency (I.E., unless certain
special rules apply, currencies other than the U.S. dollar). In general,
foreign currency gains or losses from forward contracts, from futures contracts
that are not "regulated futures contracts," and from unlisted options will be
treated as ordinary income or loss under the Code. Also, certain foreign
exchange gains derived with respect to foreign fixed-income securities are also
subject to special treatment. In general, any such gains or losses will
increase or decrease the amount of the Fund's investment company taxable income
available to be distributed to shareholders as ordinary income, rather than
increasing or decreasing the amount of the Fund's net capital gain.
Additionally, if such losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any ordinary dividend
distributions.

A Fund may incur a liability for dividend withholding tax as a result of
investment in stock or securities of foreign corporations. If, at any year end,
more than 50% of the assets of a Fund are comprised of stock or securities of
foreign corporations, a Fund may elect to "pass through" to shareholders the
amount of foreign taxes paid by that Fund. A Fund will make such an election
only if that Fund deems this to be in the best interests of its shareholders.
If a Fund does not qualify to make this election or does qualify, but does not
choose to do so, the imposition of such taxes would directly reduce the return
to an investor from an investment in that Fund.

TRANSACTIONS BY THE FUNDS
If a call option written by a Fund expires, the amount of the premium received
by the Fund for the option will be short-term or long-term capital gain to the
Fund depending on the Fund's holding period for the underlying security or
underlying futures contract. If such an option is closed by a Fund, any gain or
loss realized by the Fund as a result of the closing purchase transaction will
be short-term or long-term capital gain or loss depending on the Fund's holding
period for the underlying security or underlying futures contract. If the
holder of a call option exercises the holder's right under the option, any gain
or loss realized by the Fund upon the sale of the underlying security or
underlying futures contract pursuant to such exercise will be short-term or
long-term capital gain or loss to the Fund depending on the Fund's holding
period for the underlying security or underlying futures contract.

With respect to call options purchased by a Fund, the Fund will realize
short-term or long-term capital gain or loss

33
<PAGE>

if such option is sold and will realize short-term or long-term capital loss if
the option is allowed to expire depending on the Fund's holding period for the
call option. If such a call option is exercised, the amount paid by the Fund
for the option will be added to the basis of the stock or futures contract so
acquired.

A Fund has available to it a number of elections under the Code concerning the
treatment of option transactions for tax purposes. A Fund will utilize the tax
treatment that, in the Fund's judgment, will be most favorable to a majority of
investors in the Fund. Taxation of these transactions will vary according to
the elections made by the Fund. These tax considerations may have an impact on
investment decisions made by the Fund.

Each of the Nova Fund, the Ursa Fund, the OTC Fund, the Arktos Fund, the Metals
Fund and the Sector Funds in its operations also will utilize options on stock
indexes. Options on "broad based" stock indexes are classified as "nonequity
options" under the Code. Gains and losses resulting from the expiration,
exercise, or closing of such nonequity options, as well as gains and losses
resulting from futures contract transactions, will be treated as long-term
capital gain or loss to the extent of 60% thereof and short-term capital gain or
loss to the extent of 40% thereof (hereinafter, "blended gain or loss"). In
addition, any nonequity option and futures contract held by a Fund on the last
day of a fiscal year will be treated as sold for market value on that date, and
gain or loss recognized as a result of such deemed sale will be blended gain or
loss.

The trading strategies of each of the Nova Fund, the Ursa Fund, the OTC Fund,
the Arktos Fund, the Metals Fund and the Sector Funds involving nonequity
options on stock indexes may constitute "straddle" transactions. "Straddles"
may affect the taxation of such instruments and may cause the postponement of
recognition of losses incurred in certain closing transactions. Each of these
four Funds will also have available to the Fund a number of elections under the
Code concerning the treatment of option transactions for tax purposes. Each
such Fund will utilize the tax treatment that, in the Fund's judgment, will be
most favorable to a majority of investors in the Fund. Taxation of these
transactions will vary according to the elections made by the Fund. These tax
considerations may have an impact on investment decisions made by the Fund.

A Fund's transactions in options, under some circumstances, could preclude the
Fund's qualifying for the special tax treatment available to investment
companies meeting the requirements of Subchapter M of the Code. However, it is
the intention of each Fund's portfolio management to limit gains from such
investments to less than 10% of the gross income of the Fund during any fiscal
year in order to maintain this qualification.

OTHER ISSUES
Each Fund may be subject to tax or taxes in certain states where the Fund does
business. Furthermore, in those states which have income tax laws, the tax
treatment of a Fund and of Fund shareholders with respect to distributions by
the Fund may differ from Federal tax treatment.

Shareholders are urged to consult their own tax advisors regarding the
application of the provisions of tax law described in this Statement of
Additional Information in light of the particular tax situations of the
shareholders and regarding specific questions as to Federal, state, or local
taxes.

34
<PAGE>

OTHER INFORMATION

VOTING RIGHTS
You receive one vote for every full Fund share owned. Each Fund or class of a
Fund will vote separately on matters relating solely to that Fund or class. All
shares of the Funds are freely transferable.

As a Delaware business trust, the Trust is not required to hold annual
Shareholder meetings unless otherwise required by the 1940 Act. However, a
meeting may be called by Shareholders owning at least 10% of the outstanding
shares of the Trust. If a meeting is requested by Shareholders, the Trust will
provide appropriate assistance and information to the Shareholders who requested
the meeting. Shareholder inquiries can be made by calling 1-800-820-0888 or
301-468-8520, or by writing to the Trust at 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.

REPORTING
You will receive the Trust's unaudited financial information and audited
financial statements. In addition, the Trust will send you proxy statements and
other reports. If you are a customer of a financial institution that has
purchased shares of a Fund for your account, you may, depending upon the nature
of your account, receive all or a portion of this information directly from your
financial institution.

SHAREHOLDER INQUIRIES
You may call 800-820-0888 or 301-468-8520 to obtain information on account
statements, procedures, and other related information.

COUNSEL

Morgan, Lewis & Bockius LLP, 1800 M Street, N.W., Washington, D.C. 20036, serves
as counsel to the Trust.

AUDITORS AND CUSTODIAN

Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, are the
auditors and the independent certified public accountants of the Trust and each
of the Funds. Star Bank, N.A. (the "Custodian"), Star Bank Center, 425 Walnut
Street, Cincinnati, Ohio 45202, serves as custodian for the Trust and the Funds
under a custody agreement between the Trust and the Custodian. Under the
custody agreement, the Custodian holds the portfolio securities of each Fund and
keeps all necessary related accounts and records.

FINANCIAL STATEMENTS

The financial statements for the for the Separate Account for the period ended
June 30, 1998, including notes thereto and the report of PricewaterhouseCoopers
have been filed with the SEC and are incorporated by reference into this
Statement of Additional Information.

35
<PAGE>

APPENDIX A

BOND RATINGS

Below is a description of Standard & Poor's Ratings Group ("Standard & Poor's")
and Moody's Investors Service, Inc. ("Moody's") bond rating categories.

STANDARD & POOR'S RATINGS
GROUP CORPORATE BOND RATINGS

Aaa - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.

Aa - Bonds rated "AA" also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from "AAA" issues only in small degree.

A - Bonds rated "A" have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.

BBB - Bonds rated "BBB" are regarded as having an adequate capability to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in higher rated categories.

BB - Bonds rated "BB" have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.

B - Bonds rated "B" have a greater vulnerability to default but currently have
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.

CCC - Bonds rated "CCC" have a currently identifiable vulnerability to default
and are dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.

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

Aa - Bonds rate "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

A-1
<PAGE>

margins of protections may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long term risk appear somewhat larger than in
"Aaa" securities.

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

Baa - Bonds 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 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 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 longer period of time may be small.

Caa - Bonds 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.

A-2

<PAGE>

PART C: OTHER INFORMATION

Item 23. Exhibits:

(a)(1) Certificate of Trust of Rydex Variable Trust is incorporated by
reference to Exhibit (a) of the Initial Registration Statement,
as filed on June 17, 1998.

(a)(2) Declaration of Trust of Rydex Variable Trust is incorporated by
reference to Exhibit (a) of the Initial Registration Statement,
as filed on June 17, 1998.

(b) By-Laws are incorporated by reference to Exhibit (b) of the
Initial Registration Statement, as filed on June 17, 1998.

(d) Form of Investment Advisory Agreement between the Registrant and
PADCO Advisors II, Inc. is filed herewith.

(e)(1) Form of Distribution Agreement between the Registrant and PADCO
Financial Services, Inc. is filed herewith.

(e)(2) Form of Participation Agreement between the Registrant and PADCO
Financial Services, Inc. is filed herewith.

(f) Not Applicable

(g) Form of Custodian Agreement between the Registrant and Star Bank,
N.A. is filed herewith.

(h)(1) Form of Service Agreement between the Registrant and PADCO
Service Company, Inc. is filed herewith.

(h)(2) Form of Accounting Services Agreement between the Registrant and
PADCO Service Company, Inc. is filed herewith.

(i) Legal Opinion of Morgan, Lewis & Bockius LLP is filed herewith.

(j) Consent of Independent Accountants PricewaterhouseCoopers is
filed herewith.

(k) Not Applicable

<PAGE>

(l) Not Applicable

(m) Not Applicable

(n) Not Applicable

(o) Not Applicable

(p) Powers of Attorney for Albert P. Viragh, Jr.,
Carl G. Verboncoeur, Corey A. Colehour, J. Kenneth Dalton,
John O. Demaret, L. Gregory Gloeckner, Patrick T. McCarville,
and Roger Somers are filed herewith.

Item 24. Persons Controlled by or under Common Control with the Fund

Not applicable.

Item 25. Indemnification

Article X, Section 10.02 of the Declaration of Trust filed as Exhibit (a)(2) to
the Initial Registration Statement filed on June 17, 1998 is incorporated herein
by reference.

Item 26. Business and other Connections of the Investment Adviser:

ADVISER

PADCO Advisors II, Inc. (the "Advisor") is the investment advisor for the Trust.
The principal address of the Advisor is 6116 Executive Drive, Rockville,
Maryland. The Advisor is an investment advisor registered under the Advisers
Act.

The officers and directors of the Advisor, including information as to any
other business profession, vocation or employment of substantial nature
engaged in by such officers and directors during the past two years, are as
follows:

Name Position
---- --------
Albert P. Viragh, Jr. Chairman and President
Carl G. Verboncoeur Vice President
Robert M. Steele Vice President
Michael P. Byrum Vice President
Albert P. Viragh, Jr. Treasurer
Amanda C. Viragh Secretary
Amanda C. Viragh Assistant Treasurer

Item 27. Principal Underwriters

(a) PADCO Financial Services Inc. serves as the principal underwriter for the
securities of (i) The Rydex Institutional Money Market Fund and The
Rydex High Yield Fund, each a series of the Rydex Series Trust, (ii) The
Rydex Advisor Variable Annuity Account, a managed separate account of
Great American Reserve Insurance Company and Rydex Variable Trust, each a
registered investment company advised by PADCO Advisors II, Inc., and
(iii) the Adviser Class of the Rydex Sector Funds and U.S. Government
Money Market Fund but does not currently serve as the principal
underwriter for the securities of any other investment company.

(b) The following information is furnished with respect to the directors and
officers of PADCO Financial Services, Inc., the principal underwriter
for the Rydex Sector Funds and the U.S. Government Money Market Fund,
each a series of the Registrant:

NAME AND PRINCIPAL POSITIONS AND OFFICES WITH POSITIONS AND OFFICES
BUSINESS ADDRESS* UNDERWRITER WITH REGISTRANT
- -------------------- ---------------------------------- -------------------------
<S> <C> <C>
Albert P. Viragh, Jr. Chairman of the Board of Directors, Chairman of the Board
President and Treasurer of Trustees and President

Amanda C. Viragh Director None

Carl G. Verboncoeur

Michael P. Byrum Secretary Assistant Secretary
</TABLE>

Item 28. Location of Accounts and Records

iii
<PAGE>

Books or other documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940, and the rules promulgated thereunder, are
maintained as follows:

All accounts, books, and records required to be maintained and preserved by
Section 31(a) of the Investment Company Act of 1940, as amended, and Rules 31a-1
and 31a-2 thereunder, will be kept by the Registrant at 6116 Executive
Boulevard, Rockville, Maryland 20852.

Item 29. Management Services

Not Applicable

Item 30. Undertakings

Not Applicable

iv
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Pre-
Effective Amendment No. 1 to the Registration Statement (File No. 811-08821) to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Rockville, State of Maryland on this 13th day of October, 1998.

Rydex Variable Trust

By: /s/ Albert P. Viragh, Jr.
---------------------------
Albert P. Viragh, Jr.
President

Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 1 to the Registration Statement has been signed below by
the following persons in the capacity and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Albert P. Viragh, Jr Chairman of the Board of Trustees, October 13, 1998
- -------------------------------- Principal Executive Officer, and
Albert P. Viragh, Jr. President

/s/ Corey A. Colehour Member of the Board of Trustees October 13, 1998
- --------------------------------
Corey A. Colehour

/s/ J. Kenneth Dalton Member of the Board of Trustees October 13, 1998
- --------------------------------
J. Kenneth Dalton

/s/ John O. Demaret Member of the Board of Trustees October 13, 1998
- --------------------------------
John O. Demaret

/s/ L. Gregory Gloeckner Member of the Board of Trustees October 13, 1998
- --------------------------------
L. Gregory Gloeckner

/s/ Roger Somers Member of the Board of Trustees October 13, 1998
- --------------------------------
Roger Somers

/s/ Patrick T. McCarville Member of the Board of Trustees October 13, 1998
- --------------------------------
Patrick T. McCarville

/s/ Carl G. Verboncoeur Vice President and Treasurer October 13, 1998
- --------------------------------
Carl G. Verboncoeur
</TABLE>

v
<PAGE>

EXHIBIT INDEX

Name Exhibit Page
---- ------------
Certificate of Trust of Rydex Variable EX-99.a(1)
Trust is incorporated by reference to
Exhibit (a) of the Initial
Registration Statement, as filed on
June 17, 1998.

Declaration of Trust of Rydex Variable EX-99.a(2)
Trust is incorporated by reference to
Exhibit (a) of the Initial
Registration Statement, as filed on
June 17, 1998.

By-Laws are incorporated by reference EX-99.b
to Exhibit (b) of the Initial
Registration Statement, as filed on
June 17, 1998.

Not Applicable Ex-99.c

Form of Investment Advisory Agreement Ex-99.d
between the Registrant and PADCO
Advisors II, Inc. is filed herewith.

Form of Distribution Agreement between Ex-99.e(1)
the Registrant and PADCO Financial
Services, Inc. is filed herewith.

Form of Participation Agreement Ex-99.e(2)
between the Registrant and PADCO
Financial Services, Inc. is filed
herewith.

Not Applicable Ex-99.f

Form of Custodian Agreement between Ex-99.g
the Registrant and Star Bank, N.A. is
filed herewith.

Form of Service Agreement between the Ex-99.h(1)
Registrant and PADCO Service Company,
Inc. is filed herewith.

Form of Accounting Services Agreement Ex-99.h(2)
between the Registrant and PADCO
Service Company, Inc. is filed
herewith.

Legal Opinion of Morgan, Lewis & Bockius Ex-99.i
LLP is filed herewith.

vi
<PAGE>

Consent of Independent Accountants
PricewaterhouseCoopers is Ex-99.j
filed herewith.

Not Applicable Ex-99.k

Not Applicable Ex-99.l

Not Applicable Ex-99.m

Not Applicable Ex-99.o

Powers of Attorney for Albert P. Ex-99.p
Viragh, Jr., Carl G. Verboncoeur,
Corey A. Colehour, J. Kenneth Dalton,
John O. Demaret, L. Gregory Gloeckner,
Patrick T. McCarville, and Roger
Somers are filed herewith.

vii

<PAGE>

INVESTMENT ADVISORY AGREEMENT

BETWEEN

THE RYDEX VARIABLE TRUST

AND

PADCO ADVISORS II, INC.

<PAGE>

THIS INVESTMENT ADVISORY AGREEMENT (the "Agreement"), dated as of August
11, 1998 is entered into by and between THE RYDEX VARIABLE TRUST (the "Trust"),
a Delaware business trust established on June 11, 1998 and PADCO ADVISORS II,
INC. (the "Advisor"), a company incorporated under the laws of the State of
Maryland on July 5, 1994.

W I T N E S S E T H:

WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "Commission") as an open-end management investment company
pursuant to the provisions of the Investment Company Act of 1940, as amended
(the "1940 Act");

WHEREAS, the Advisor is an investment adviser registered as such with the
Commission pursuant to the provisions of the Investment Advisers Act of 1940,
and is engaged in the business of rendering investment advice and investment
management services as an independent contractor;

WHEREAS, the Agreement and Declaration of Trust of the Trust (the "Trust
Declaration") authorizes the Trustees of the Trust to create an unlimited number
of series of shares of the Trust.

WHEREAS, the board of trustees of the Trust (the "Trustees") have created
the following Funds of the Trust: The Nova Fund, The Ursa Fund, The OTC Fund,
The Arktos Fund, The Precious Metals Fund, The Juno Fund, The U.S. Government
Bond Fund, The U.S. Government Money Market Fund, Banking Fund, Basic Materials
Fund, Biotechnology Fund, Consumer Products Fund, Electronics Fund, Energy Fund,
Energy Services Fund, Financial Services Fund, Health Care Fund, Leisure Fund,
Retailing Fund, Technology Fund, Telecommunications Fund, and Transportation
Fund (collectively, the "Funds");

WHEREAS, the Trust wishes to engage the Advisor, and the Advisor wishes to
be engaged, to manage the investment portfolios of the Funds of the Trust with
respect to the investment and reinvestment of the assets of the Funds of the
Trust, and to act in such capacity in accordance with the terms, conditions, and
other provisions of this Agreement; and

WHEREAS, the Trust wishes to engage the Advisor, and the Advisor wishes to
be engaged, to manage the investment portfolios of the Funds of the Trust which
were created subsequent to this Agreement with respect to the investment and
reinvestment of the assets of such future Funds of the Trust, and to act in such
capacity in accordance with the terms, conditions, and other provisions of this
Agreement.

NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and for other good and valuable consideration, the receipt,
sufficiency, and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, agree and promise as follows:

-2-
<PAGE>

1. SERVICES TO BE PROVIDED

(a) EMPLOYMENT. The Trust hereby employs the Advisor to manage the
investment and reinvestment of the assets of the Funds, including each
of the Funds, comprising the Trust in accordance with the investment
objectives and policies as set forth in the Trust's registration
statement filed pursuant to the Securities Act of 1933, as amended
(the "1933 Act"), and the 1940 Act (the "Registration Statement"), and
subject to the direction and control of the officers and the Board of
Trustees of the Trust, for the period and on the terms set forth in
this Agreement. The Advisor hereby accepts such employment and agrees
to render the services and to assume the obligations herein set forth,
for the compensation herein provided.

(b) BEST EFFORTS. The Advisor hereby agrees to use its best judgment and
efforts to rendering the advice and services with respect to the Funds
as contemplated by this Agreement. The Advisor further agrees to use
its best efforts in the furnishing of such advice and recommendations
with respect to the Funds, in the preparation of reports and
information, and in the management of the respective assets of each
Fund, all pursuant to this Agreement, and for this purpose the Advisor
shall, at its own expense, maintain such staff and employ or retain
such personnel and consult with such other persons that the Advisor
shall from time to time determine to be necessary to the performance
of the Advisor's obligations under this Agreement. Without limiting
the generality of the foregoing, the staff and personnel of the
Advisor shall be deemed to include persons employed or retained by the
Advisor to furnish statistical, research, and other factual
information, advice regarding economic factors and trends, information
with respect to technical and scientific developments, and such other
information, advice, and assistance as the Advisor may desire and
request.

2. PAYMENT OF FEES AND EXPENSES

The Advisor assumes and shall pay all expenses in connection with the
management of the investment and reinvestment of the portfolio assets of each
Fund, except that each Fund assumes and shall pay all broker's commissions and
transfer taxes chargeable to the Fund in connection with securities transactions
to which the Fund is a party.

3. AUTHORITY OF THE ADVISOR

a. In connection with the investment and reinvestment of the assets of
each of the Funds, the Advisor is authorized on behalf of the Fund, to
place orders for the execution of the Fund's portfolio transactions in
accordance with the applicable policies of the Fund as set forth in
the Trust's Registration Statement, as such Registration Statement may
be amended from time to time. The Advisor shall place orders for the
purchase or sale of securities either directly with the issuer or with
a

-3-
<PAGE>

broker or dealer selected by the Advisor. In placing the Fund's
securities trades, it is recognized that the Advisor will give primary
consideration to securing the most favorable price and efficient
execution, so that the Fund's total cost or proceeds in each
transaction will be the most favorable under all circumstances.
Within the framework of this policy, the Advisor may consider the
financial responsibility, research and investment information, and
other services provided by brokers or dealers who may effect or be a
party to any such transaction or other transactions to which other
clients of the Advisor may be a party.

b. It is understood that it is desirable for each Fund of the Trust that
the Advisor have access to investment and market research and
securities and economic analyses provided by brokers and others. It
is also understood that brokers providing such services may execute
brokerage transactions at a higher cost to the Fund than might result
from the allocation of brokerage to other brokers purely based on
seeking the most favorable price. Therefore, the purchase and sale of
securities for the Fund may be made with brokers who provide such
research and analysis, subject to review by the Trustees from time to
time with respect to the extent and continuation of this practice to
determine whether the Fund benefits, directly or indirectly, from such
practice. It is understood by both parties that the Advisor may
select broker-dealers for their execution of the Fund's portfolio
transactions who provide research and analysis as the Advisor may
lawfully and appropriately use in its investment management and
advisory capacities, whether or not such research and analysis also
may be useful to the Advisor in connection with its services to other
clients.

c. On occasions when the Advisor deems the purchase or sale of a security
to be in the best interests of the Fund, as well as of other clients,
the Advisor to the extent permitted by applicable laws and
regulations, may aggregate the securities to be so purchased or sold
in order to obtain the most favorable price, lower brokerage
commissions, and the most efficient execution. In such event,
allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Advisor in
the manner it considers to be the most equitable and consistent with
its fiduciary obligations to the Fund and to such other clients.

4. COMPENSATION

a. ADVISORY FEE. In exchange for the rendering of advice and services
pursuant hereto, the Trust shall pay the Advisor, and the Advisor
shall accept as full compensation for the services to be rendered and
as full reimbursement for all the charges and expenses to be assumed
and paid by the Advisor as provided in Section 2, a fee at an annual
rate applied to the daily net assets of a Fund in accordance with the
following schedule:

<TABLE>
<S> <C>
Nova Fund. . . . . . . . . . . . . 0.75% (75/100s of one percent)

-4-
<PAGE>

Ursa Fund. . . . . . . . . . . . . 0.90% (90/100s of one percent)
OTC Fund . . . . . . . . . . . . . 0.75% (75/100s of one percent)
Precious Metals Fund . . . . . . . 0.75% (75/100s of one percent)
U.S. Government Bond Fund. . . . . 0.50% (50/100s of one percent)
Juno Fund. . . . . . . . . . . . . 0.90% (90/100s of one percent)
U.S. Government Money
Market Fund . . . . . . . . . . . 0.50% (50/100s of one percent)
Arktos Fund. . . . . . . . . . . . 0.90% (90/100s of one percent)
Banking Fund . . . . . . . . . . . 0.85% (85/100s of one percent)
Basic Materials Fund . . . . . . . 0.85% (85/100s of one percent)
Biotechnology Fund . . . . . . . . 0.85% (85/100s of one percent)
Consumer Products Fund . . . . . . 0.85% (85/100s of one percent)
Electronics Fund . . . . . . . . . 0.85% (85/100s of one percent)
Energy Fund. . . . . . . . . . . . 0.85% (85/100s of one percent)
Energy Services Fund . . . . . . . 0.85% (85/100s of one percent)
Financial Services Fund. . . . . . 0.85% (85/100s of one percent)
Health Care Fund . . . . . . . . . 0.85% (85/100s of one percent)
Leisure Fund . . . . . . . . . . . 0.85% (85/100s of one percent)
Retailing Fund . . . . . . . . . . 0.85% (85/100s of one percent)
Technology Fund. . . . . . . . . . 0.85% (85/100s of one percent)
Telecommunications Fund. . . . . . 0.85% (85/100s of one percent)
Transportation Fund. . . . . . . . 0.85% (85/100s of one percent)
</TABLE>

b. PAYMENT. The fee will be accrued daily by each Fund and paid to the
Advisor monthly not later than the fifth (5th) business day of the
month following the month for which services have been provided. In
the event of termination of this Agreement, the fee shall be computed
on the basis of the period ending on the last business day on which
this Agreement is in effect subject to a pro rata adjustment based on
the number of days elapsed in the current month as a percentage of the
total number of days in such month, and such fee shall be payable on
the date of termination of this Agreement with respect to the Fund.
For purposes of calculating the Advisor's fee, the value of the net
assets of each respective Fund of the Trust shall be determined in the
same manner as the Fund uses to compute the value of the Fund's net
assets in connection with the determination of the Net Asset Value of
the Fund, all as set forth more fully in the current Prospectus and
Statement of Additional Information for the Funds included in the
Registration Statement.

5. AFFILIATIONS OF PARTIES; CHANGE IN OWNERSHIP OR CONTROL OF THE ADVISOR

Subject to and in accordance with the Trust Declaration, the By-Laws and
Articles of Incorporation of the Advisor, and the 1940 Act, the Trustees,
officers, agents, and shareholders of the Trust are or may be interest persons
of the Advisor or its affiliates (or any successor thereof) as shareholders or
officers, directors, agents, or otherwise, and directors, officers, agents, or
shareholders of the Advisor or its affiliates are or may be interested persons
of the Trust as Trustees,

-5-
<PAGE>

officers, agents, shareholders, or otherwise, and the Advisor or its affiliates
may be interested persons of the Trust, and such relationships shall be governed
by said governing instruments and the applicable provisions of the 1940 Act.
The Advisor shall notify the Trust of any change in ownership or control of
PADCO Advisors II, Inc., that could cause an "assignment" of this Agreement (as
the term "assignment" is defined in the 1940 Act and the rules and regulations
promulgated thereunder) as soon as practicable. In the case of a voluntary
assignment, notice will be provided at least 90 days prior to the voluntary
assignment if the circumstances are such that the Trust could not rely on Rule
15a-4 under the 1940 Act (or such shorter period approved by a majority of the
Trustees who are not interested persons of the Trust).

6. FURNISHING OF INFORMATION

During the term of this Agreement, the Trust agrees:

a. to provide the Advisor with copies of all prospectuses, statements of
additional information, proxy statements, registration statements,
reports to Shareholders, sales literature, and other material prepared
for distribution to Shareholders of the Funds of the Trust or the
public that refer in any way to the Advisor, no later than ten (10)
business days before the date such material is first distributed to
the public, or sooner if practicable, and the Trust shall not use such
material, if the Advisor reasonably objects in writing within five (5)
business days (or within such other time as may be mutually agreed to
by the parties) after the Advisor's receipt thereof;

b. to provide the Advisor with true and correct copies of each amendment
or supplement to the Trust's Registration Statement (including any
prospectus and statement of additional information included therein)
or the Trust Declaration not later than the date such material is
first distributed to the public, or sooner if practicable; and

c. to provide the Advisor with (i) written notice of any resolutions,
policies, restrictions, or procedures adopted by the Trustees which
affect the Advisor's investment management responsibilities hereunder,
and (ii) a list of every natural person or entity deemed by the Trust
to be an "affiliated person" of, or "promoter" of, or "principal
underwriter" for the Trust, or "an affiliated person of such person,"
as these terms are defined or used in Sections 2(a)(3), 2(a)(30), and
2(a)(29), respectively, of the 1940 Act, and the Trust shall promptly
notify the Advisor of any additions or deletions to such list.

7. TERM OF AGREEMENT; TERMINATION

a. This Agreement shall become effective with respect to each Fund on the
date first above written, and continue in effect until two (2) years
from the date hereof, and thereafter only so long as such continuance
is approved with respect to the Fund at

-6-
<PAGE>

least annually by (i) a vote of a majority of the Trustees, and (ii) a
vote of a majority of the Trustees who are not parties to this
Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting such approval.

b. This Agreement may be terminated on sixty (60) days prior written
notice to the Advisor with respect to any or all Funds without penalty
either by vote of the Trustees or by vote of a majority of the
outstanding voting securities of the Fund(s). This Agreement shall
automatically terminate in the event of its assignment (within the
meaning of the 1940 Act). This Agreement may be terminated by the
Advisor on sixty (60) days prior written notice to the Trust. Any
notice under this Agreement shall be given as provided in Section 12
below.

8. NON-TRANSFERABILITY

This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged without the affirmative vote or prior written consent of
the holders of a majority of the outstanding voting securities of the Trust.

9. OTHER ACTIVITIES OF THE ADVISOR

The services of the Advisor to the Trust hereunder are not to be deemed
exclusive, and the Advisor and each of its affiliates shall be free to render
similar services to others so long as the Advisor's services hereunder are not
impaired thereby. The Advisor, for purposes herein, shall be deemed to be an
independent contractor and, unless otherwise expressly provided or authorized,
shall have no authority to act for or represent the Trust, including any of the
Funds of the Trust, in any way or otherwise be deemed an agent of the Trust, or
the Funds of the Trust.

10. STANDARD OF CARE; INDEMNIFICATION

a. No provisions of this Agreement shall be deemed to protect the Advisor
against any liability to the Trust, the Funds of the Trust, or the
Shareholders of the Funds to which the Advisor otherwise would be
subject by reason of any willful misfeasance, bad faith, or gross
negligence in the performance of the Advisor's duties or the reckless
disregard of the Advisor's obligations under this Agreement. Nor
shall any provisions hereof be deemed to protect any Trustee or
officer of the Trust against any such liability to which said Trustee
or officer might otherwise be subject by reason of any willful
misfeasance, bad faith, or gross negligence in the performance of the
Trustee's or officer's respective duties or the reckless disregard of
the Trustee's or officer's respective obligations.

b. In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the Advisor's obligations or duties hereunder,
the Advisor shall not be subject to liability to the Trust, to the
Funds, or to any Shareholder of the Funds for

-7-
<PAGE>

any act or omission in the course of, or connected with, rendering
services hereunder or for any losses that may be sustained in the
purchase, holding, or sale of any security or other property by a
Fund. The Advisor shall not be required to do or refrain from doing
or concur in anything which (by act or omission to act) may impose any
liability on the Advisor.

c. Any person, even though an officer, director, partner, employee, or
agent of the Trustee, who may be or become an officer, director,
trustee, partner, employee, or agent of the Trust, shall be deemed
when rendering such services to the Trust or acting on any business of
the Trust to be rendering such services to or acting solely for the
Trust and not as the Trustee's officer, director, trustee, partner,
employee, or agent or as one under the Trustee's control or direction
even though paid by the Trustee.

11. REPRESENTATIONS AND WARRANTIES OF THE TRUST

The Trust represents and warrants that the Trust is duly registered with
the Securities and Exchange Commission under the 1940 Act, as an open-end
management investment company, and that all required action has been taken by
the Trust under the 1933 Act and the 1940 Act, to permit the public offering of,
and to consummate the sale of, the shares of the Trust pursuant to the current
prospectus of the Trust.

12. NOTICES

All notices or other communications required or permitted to be given
hereunder shall be in writing and shall be delivered or sent by prepaid,
first-class letter posted to the following addresses, or to such other address
as shall be designated in a notice given in accordance with this section, and
such notice shall be deemed to have been given at the time of delivery of, if
sent by post, five (5) week days after posting by airmail.

If to the Trust: Rydex Variable Trust
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
ATTENTION: President

If to the Advisor: PADCO Advisors II, Inc.
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
ATTENTION: President

-8-
<PAGE>

13. GOVERNING LAW

This Agreement shall be governed by and construed in accordance with the
laws of the State of Maryland (without reference to such state's conflict of law
rules).

14. COUNTERPARTS

This Agreement shall be executed in two or more counterparts, each of which
shall be deemed an original, but which together shall constitute one and the
same instrument.

15. DEFINITIONS

As used in this Agreement, the terms "interested persons" and "vote of a
majority of the outstanding securities" shall have the respective meanings set
forth in Section 2(a)(19) and Section 2(a)(42) of the 1940 Act.

-9-
<PAGE>

IN WITNESS WHEREOF, the Trust and the Advisor have caused this Agreement to
be executed on the date first above written.

RYDEX VARIABLE TRUST

By:
--------------------------------

PADCO ADVISORS II, INC.

By:
--------------------------------

-10-

<PAGE>

FORM OF

DISTRIBUTION AGREEMENT

AGREEMENT, dated as of ________, 1998, by and between RYDEX VARIABLE TRUST,
a Delaware business trust (the "Fund") and PADCO FINANCIAL SERVICES, INC., a
__________ corporation (the "Distributor).

WITNESSETH:

WHEREAS, the Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act);

WHEREAS, the Fund desires to offer and sell shares of its portfolios (the
"Portfolios") to life insurance companies to be held in their separate accounts
("Separate Accounts") pursuant to variable annuity contracts and variable life
insurance policies and to entities qualified under pension and retirement plans
("Qualified Plan Entities");

WHEREAS, the Distributor is registered as a broker-dealer under the
Securities Exchange Act of 1934, as amended ("Securities Exchange Act") and is a
member of the National Association of Securities Dealers, Inc. ("NASD").

NOW THEREFORE, the Fund and the Distributor agree as follows:

Section 1. The Distributor shall assist the Fund in marketing and
selling shares of the Portfolios to Separate Accounts and to Qualified Plan
Entities and to persons who have interests in such Separate Accounts and
Qualified Plan Entities. In all cases where the Fund enters into participation
agreements with life insurance companies for the sale of shares of the

<PAGE>

Portfolios to Separate Accounts and Qualified Plan Entities, the Distributor
shall act in full accordance with such participation agreements.

Section 2. Purchases and redemptions of shares of the Portfolios shall
be at net asset value, computed as set forth in the most recent Prospectuses and
Statements of Additional Information ("SAIs") relating to the Fund contained in
the Registration Statement of the Fund on Form N-1A, File No._________, or any
amendments or supplements thereto ("Registration Statement").

Section 3. The Fund represents to the Distributor that the Registration
Statement contains all statements and information which are required to be
stated therein under the Securities Act of 1933, as amended, (the "1933 Act"),
and the rules adopted thereunder, and in all respects conforms to the
requirements of the 1933 Act, and the rules adopted thereunder, and neither the
Fund's prospectus nor its SAI includes any untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein no misleading; PROVIDED, that the foregoing
representations shall not apply to information contained in or omitted from the
Fund's Prospectuses or SAIs in reliance upon, and in conformity with, written
information furnished by the Distributor specifically for use in the preparation
thereof.

Section 4. The Distributor shall submit to all regulatory and
administrative bodies having jurisdiction over the operations of the Distributor
and the Fund, present or future, any information, reports or other material
which any such body by reason of this Agreement may request or require as
authorized by applicable laws or regulations.

-2-
<PAGE>

Section 5. This Agreement shall be subject to the provisions of the
1940 Act, the Securities Exchange Act and the 1933 Act and the rules,
regulations, and rulings thereunder and of the NASD, from time to time in
effect, including such exemptions from the 1940 Act and no-action positions as
the Securities and Exchange Commission or its staff may grant, and the terms
hereof shall be interpreted and construed in accordance therewith. Without
limiting the generality of the foregoing, (a) the term "assigned" shall not
include any transaction exempted from section 15(b)(2) of the 1940 Act and (b)
the vote of the persons having voting rights in respect of the Fund referred to
in Section 6 hereof shall be the affirmative votes of the lesser of (I) the
holders of more than 50% of all votes entitled to be cast in respect of the Fund
or (ii) the holders of at least 67% of the votes which are present at a meeting
of such persons if the holders of more than 50% of all votes entitled to be cast
voted in accordance with the By-laws of the Fund.

Section 6. This Agreement shall continue in effect only so long as such
continuance is specifically approved at least annually (a) by a majority of the
Directors of the Fund who are not interested persons of the Fund or the
Distributor and (b) by persons having voting rights in respect of the Fund, by
the vote stated in Section 5 hereof, voted in accordance with the By-laws of the
Fund, or by the Board of Directors of the Fund.

Section 7. This Agreement shall terminate automatically in the event of
its assignment.

-3-
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.

RYDEX VARIABLE TRUST

By:
------------------------------

Name:
---------------------------

Title:
--------------------------

Attest:

By:
------------------------------

Name:
---------------------------

Title:
--------------------------

PADCO FINANCIAL SERVICES, INC.

By:
------------------------------

Name:
---------------------------

Title:
--------------------------

Attest:

By:
------------------------------

Name:
---------------------------

Title:
--------------------------

-4-
<PAGE>

-5-

<PAGE>

D R A F T

PARTICIPATION AGREEMENT

AMONG

RYDEX VARIABLE TRUST,

PADCO FINANCIAL SERVICES, INC.

AND

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

DATED AS OF

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

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I Purchase of Trust Shares. . . . . . . . . . . . . . . . . . . . 2

ARTICLE II Representations and Warranties. . . . . . . . . . . . . . . . . 4

ARTICLE III Prospectuses, Reports to Shareholders
and Proxy Statements, Voting. . . . . . . . . . . . . . . . . . 6

ARTICLE IV Sales Material and Information. . . . . . . . . . . . . . . . . 7

ARTICLE V Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . 9

ARTICLE VI Diversification . . . . . . . . . . . . . . . . . . . . . . . . 9

ARTICLE VII Potential Conflicts . . . . . . . . . . . . . . . . . . . . . . 9

ARTICLE VIII Indemnification . . . . . . . . . . . . . . . . . . . . . . . .11

ARTICLE IX Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . .17

ARTICLE X Termination . . . . . . . . . . . . . . . . . . . . . . . . . .17

ARTICLE XI Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

ARTICLE XII Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . .19

SCHEDULE A Separate Accounts and Contracts . . . . . . . . . . . . . . . .22

SCHEDULE B Proxy Voting Procedures . . . . . . . . . . . . . . . . . . . .23
</TABLE>

<PAGE>

THIS AGREEMENT, made and entered into as of the ____ day of __________,
1998 by and among ________________________ (hereinafter the "Company"), a
_______________ corporation, on its own behalf and on behalf of each separate
account of the Company set forth on Schedule A hereto as may be amended from
time to time (each such account hereinafter referred to as the "Account"), RYDEX
VARIABLE TRUST (hereinafter the "Trust"), a Delaware business trust, and PADCO
FINANCIAL SERVICES, INC. (hereinafter the "Underwriter"), a Maryland
corporation.

WHEREAS, the Trust engages in business as an open-end management investment
company and is available to act as (i) the investment vehicle for separate
accounts established by insurance companies for individual and group life
insurance policies and individual and group annuity contracts with variable
accumulation and/or pay-out provisions (hereinafter referred to individually
and/or collectively as "Variable Insurance Products") and (ii) the investment
vehicle for certain qualified pension and retirement plans (hereinafter
"Qualified Plans"); and

WHEREAS, insurance companies desiring to utilize the Trust as an investment
vehicle under their Variable Insurance Products enter into participation
agreements with the Trust and the Underwriter (the "Participating Insurance
Companies");

WHEREAS, beneficial interests in the Trust are divided into several series
of interests or shares, each representing the interest in a particular managed
portfolio of securities and other assets, any one or more of which may be made
available under this Agreement, as may be amended from time to time by mutual
agreement of the parties hereto (each such series is hereinafter referred to as
a "Fund"); and

WHEREAS, the Trust has obtained an order from the Securities and Exchange
Commission, dated _______________________ (File No. __________), granting
Participating Insurance Companies and Variable Insurance Product separate
accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a), and
15(b) of the Investment Company Act of 1940, as amended (hereinafter the "1940
Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent
necessary to permit shares of a Fund to be sold to and held by Variable
Insurance Product separate accounts of both affiliated and unaffiliated life
insurance companies and Qualified Plans (hereinafter the "Shared Funding
Exemptive Order"); and

WHEREAS, the Trust is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and

WHEREAS, the Underwriter is registered as a broker/dealer under the
Securities Exchange Act of 1934, as amended (hereinafter the "1934 Act"), is a
member in good standing of the National Association of Securities Dealers, Inc.
(hereinafter "NASD") and serves as principal underwriter of the shares of the
Trust; and

<PAGE>

WHEREAS, the Company has registered or will register certain Variable
Insurance Products under the 1933 Act; and

WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, on the date shown for such Account on Schedule A
hereto, to set aside and invest assets attributable to the aforementioned
Variable Insurance Products; and

WHEREAS, the Company has registered or will register each Account as a unit
investment trust under the 1940 Act; and

WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Funds on behalf of
each Account to fund certain of the aforementioned Variable Insurance Products
and the Underwriter is authorized to sell such shares to each such Account at
net asset value;

NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Trust and each Underwriter agree as follows:

ARTICLE I. PURCHASE OF TRUST SHARES

1.1. The Trust agrees to make available for purchase by the Company shares
of the Trust and shall execute orders placed for each Account on a daily basis
at the net asset value next computed after receipt by the Trust or its designee
of such order. For purposes of this Section 1.1, the Company shall be the
designee of the Trust for receipt of such orders from each Account and receipt
by such designee shall constitute receipt by the Trust; provided that the Trust
receives notice of such order not later than the appropriate fund closing time
on the same Business Day that such order is received by the Company. "Business
Day" shall mean any day on which the New York Stock Exchange is open for trading
and on which the Trust calculates its net asset value pursuant to the rules of
the Securities and Exchange Commission.

1.2. The Trust, so long as this Agreement is in effect, agrees to make its
shares available indefinitely for purchase at the applicable net asset value per
share by the Company and its Accounts on those days on which the Trust
calculates its net asset value pursuant to rules of the Securities and Exchange
Commission and the Trust shall use reasonable efforts to calculate such net
asset value on each day which the New York Stock Exchange is open for trading.
Notwithstanding the foregoing, the Board of Trustees of the Trust (hereinafter
the "Board") may refuse to permit the Trust to sell shares of any Fund to any
person, or suspend or terminate the offering of shares of any Fund if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Board acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Fund.

-2-
<PAGE>

1.3. The Trust agrees that shares of the Trust will be sold only to
Participating Insurance Companies and their separate accounts and to certain
Qualified Plans. No shares of any Fund will be sold to the general public.

1.4. The Trust will not make its shares available for purchase by any
insurance company or separate account unless an agreement containing provisions
substantially the same as in Section 1.3 of Article I, Section 3.5 of Article
III, Article VI and Article VII of this Agreement is in effect to govern such
sales.

1.5. The Trust agrees to redeem for cash, on the Company's request, any
full or fractional shares of a Trust held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Trust or its designee of the request for redemption. Subject to and in
accordance with applicable laws, and subject to written consent of the Company,
the Trust may redeem shares for assets other than cash. For purposes of this
Section 1.5, the Company shall be the designee of the Trust for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Trust; provided that the Trust receives notice of such
order not later than the appropriate fund closing time on the same Business Day
that such order is received by the Company.

1.6. The Company agrees that purchases and redemptions of Fund shares
offered by the then current prospectus of the Trust shall be made in accordance
with the provisions of such prospectus. The Variable Insurance Products issued
by the Company, under which amounts may be invested in the Trust (hereinafter
the "Contracts"), are listed on Schedule A attached hereto and incorporated
herein by reference, as such Schedule A may be amended from time to time by
mutual written agreement of all of the parties hereto. The Company will give
the Trust and the Underwriter 45 days advance written notice of its intention to
make available in the future, as a funding vehicle under the Contracts, any
other investment company.

1.7. The Company shall pay for Trust shares on the next Business Day after
an order to purchase Trust shares is made in accordance with the provisions of
Section 1.1 hereof. Payment shall be in federal funds transmitted by wire. For
purposes of Section 2.9 and 2.10, upon receipt by the Trust of the federal funds
so wired, such funds shall cease to be the responsibility of the Company and
shall become the responsibility of the Trust.

1.8. Issuance and transfer of the Trust's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Trust will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.

1.9. The Trust shall furnish same day notice (by electronic means, wire or
telephone, followed by written confirmation) to the Company of any income,
dividends or capital gain distributions payable on Fund shares. The Company
hereby elects to receive all such income

-3-
<PAGE>

dividends and capital gain distributions as are payable on the Fund shares in
additional shares of that Fund. The Company reserves the right to revoke this
election and to receive all such income dividends and capital gain distributions
in cash. The Trust shall notify the Company of the number of shares so issued
as payment of such dividends and distributions.

1.10. The Trust shall make the net asset value per share for each Fund
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Eastern time)
and shall use its best efforts to make such net asset value per share available
by 7:00 p.m. Eastern time.

ARTICLE II. REPRESENTATIONS AND WARRANTIES

2.1. The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established each
Account prior to any issuance or sale thereof as a segregated asset account
under Section _______________________ and has registered or, prior to any
issuance or sale of the Contracts, will register each Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts.

2.2. The Trust represents and warrants that Trust shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Delaware and all
applicable federal and state securities laws and that the Trust is and shall
remain registered under the 1940 Act. The Trust shall amend the registration
statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Trust
shall register and qualify the shares for sale in accordance with the laws of
the various states, to the extent required by applicable state law.

2.3. The Trust represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.

2.4. The Company represents and warrants that the Contracts are currently
treated as life insurance policies or annuity contracts, under applicable
provisions of the Code and that it will make every effort to maintain such
treatment and that it will notify the Trust immediately

-4-
<PAGE>

upon having a reasonable basis for believing that the Contracts have ceased to
be so treated or that they might not be so treated in the future.

2.5. The Trust represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, it will have a
board of trustees, a majority of whom are not interested persons of the Trust,
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.

2.6. The Trust represents that the Trust's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Delaware and the Trust represents that their respective operations are
and shall at all times remain in material compliance with the laws of the State
of Delaware to the extent required to perform this Agreement.

2.7. The Trust represents that it is lawfully organized and validly
existing under the laws of the State of Delaware and that it does and will
comply in all material respects with the 1940 Act.

2.8. The Underwriter represents and warrants that it is and shall remain
duly registered in all material respects to the extent under all applicable
federal and state securities laws and that it will perform its obligations for
the Trust in compliance in all material respects with the laws of its state of
domicile and any applicable state and federal securities laws.

2.9. The Trust represents and warrants that its directors, officers,
employees, and other individuals/entities dealing with the money and/or
securities of the Trust are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Trust in an
amount not less than the minimum coverage as required currently by Rule 17g-(1)
of the 1940 Act or related provisions as may be promulgated from time to time.
The aforesaid blanket fidelity bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.

2.10. The Company represents and warrants that all of its directors,
officers, employees, investment Underwriter, and other individuals/entities
dealing with the money and/or securities of the Trust are covered by a blanket
fidelity bond or similar coverage, in an amount not less $5 million. The
aforesaid includes coverage for larceny and embezzlement is issued by a
reputable bonding company. The Company agrees to make all reasonable efforts to
see that this bond or another bond containing these provisions is always in
effect, and agrees to notify the Trust and the Underwriter in the event that
such coverage no longer applies.

-5-
<PAGE>

ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING

3.1. The Trust or its designee shall provide the Company with as many
printed copies of the Trust's current prospectus and statement of additional
information as the Company may reasonably request. If requested by the Company,
in lieu of providing printed copies the Trust shall provide camera-ready film or
computer diskettes containing the Trust's prospectus and statement of additional
information, and such other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Trust is amended during the year) to
have the prospectus for the Contracts and the Trust's prospectus printed
together in one document, and to have the statement of additional information
for the Trust and the statement of additional information for the Contracts
printed together in one document. Alternatively, the Company may print the
Trust's prospectus and/or its statement of additional information in combination
with other Trust companies' prospectuses and statements of additional
information.

3.2. Except as provided in this Section 3.2., all expenses of printing and
distributing Trust prospectuses and statements of additional information shall
be the expense of the Company. For prospectuses and statements of additional
information provided by the Company to its existing owners of Contracts in order
to update disclosure as required by the 1933 Act and/or the 1940 Act, the cost
of printing shall be borne by the Trust. If the Company chooses to receive
camera-ready film or computer diskettes in lieu of receiving printed copies of
the Trust's prospectus, the Trust will reimburse the Company in an amount equal
to the product of x and y where x is the number of such prospectuses distributed
to owners of the Contracts, and y is the Trust's per unit cost of typesetting
and printing the Trust's prospectus. The same procedures shall be followed with
respect to the Trust's statement of additional information. The Company agrees
to provide the Trust or its designee with such information as may be reasonably
requested by the Trust to assure that the Trust's expenses do not include the
cost of printing any prospectuses or statements of additional information other
than those actually distributed to existing owners of the Contracts.

3.3. The Trust's statement of additional information shall be obtainable
from the Trust, the Company or such other person as the Trust may designate, as
agreed upon by the parties.

3.4. The Trust, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications (except
for prospectuses and statements of additional information, which are covered in
section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract owners.

3.5. If and to the extent required by law the Company shall:

(i) solicit voting instructions from Contract owners;

-6-
<PAGE>

(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and

(iii) vote Fund shares for which no instructions have been
received in the same proportion as Trust shares of such
Fund for which instructions have been received,

so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any Account in its own right, to the extent permitted by law.
The Trust and the Company shall follow the procedures, and shall have the
corresponding responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule B attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible for
ensuring that each of their separate accounts participating in a Fund calculates
voting privileges in a manner consistent with the standards set forth on
Schedule B, which standards will also be provided to the other Participating
Insurance Companies.

3.6. The Trust will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Trust will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Trust
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Trust will act
in accordance with the Securities and Exchange Commission's interpretation of
the requirements of Section 16(a) with respect to periodic elections of
directors and with whatever rules the Commission may promulgate with respect
thereto.

3.7. The Trust shall use reasonable efforts to provide Trust prospectuses,
reports to shareholders, proxy materials and other Trust communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable cost,
the printing, assembling and distribution of the communications in accordance
with applicable laws and regulations.

ARTICLE IV. SALES MATERIAL AND INFORMATION

4.1. The Company shall furnish, or shall cause to be furnished, to the
Underwriter, each piece of sales literature or other promotional material in
which the Trust or the Underwriter is named, at least five Business Days prior
to its use. No such material shall be used if the Trust or its designee
reasonably objects to such use within five Business Days after receipt of such
material.

4.2. The Company shall not give any information or make any
representations or statements on behalf of the Trust or concerning the Trust in
connection with the sale of the

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<PAGE>

Contracts other than the information or representations contained in the
registration statement or prospectus for the Trust, as such registration
statement and prospectus may be amended or supplemented from time to time, or in
reports or proxy statements for the Trust, or in sales literature or other
promotional material approved by the Trust or its designee, except with the
permission of the Trust.

4.3. The Trust or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company or its separate account(s) or
Contracts are named at least five Business Days prior to its use.

No such material shall be used if the Company or its designee
reasonably objects to such use within five Business Days after receipt of such
material.

4.4. The Trust and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Contracts, other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.

4.5. The Trust will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Trust or its shares, contemporaneously
with the filing of such document with the Securities and Exchange Commission or
other regulatory authorities.

4.6. The Company will provide to the Trust at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in the Trust under the Contracts, contemporaneously with the filing of such
document with the Securities and Exchange Commission or other regulatory
authorities.

4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Trust or any affiliate of the Trust: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature

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<PAGE>

(I.E., any written communication distributed or made generally available to
customers or the public, including brochures, circulars, research reports,
market letters, form letters, seminar texts, reprints or excerpts of any other
advertisement, sales literature, or published article), educational or training
materials or other communications distributed or made generally available to
some or all agents or employees, and registration statements, prospectuses,
statements of additional information, shareholder reports, and proxy materials.

ARTICLE V. FEES AND EXPENSES

5.1. The Trust shall pay no fee or other compensation to the Company under
this Agreement, except that if the Trust or any Fund adopts and implements a
plan pursuant to Rule 12b-1 to finance distribution expenses, then the
Underwriter may make payments to the Company or to the underwriter for the
Contracts if and in amounts agreed to by the Underwriter in writing.

5.2. All expenses incident to performance by the Trust under this
Agreement shall be paid by the Trust. The Trust shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Trust, in
accordance with applicable state laws prior to their sale. The Trust shall bear
the expenses for the cost of registration and qualification of Fund shares,
preparation and filing of the Trust's prospectus and registration statement,
proxy materials and reports, setting the prospectus in type, setting in type and
printing the proxy materials and reports to shareholders (including the costs of
printing a prospectus that constitutes an annual report), the preparation of all
statements and notices required by any federal or state law, and all taxes on
the issuance or transfer of Fund shares.

5.3. The Company shall bear the expenses of distributing the Trust's
prospectus, proxy materials and reports to owners of Contracts issued by the
Company, other than the expenses of distributing prospectuses and statements of
additional information to existing contract owners.

ARTICLE VI. DIVERSIFICATION

6.1. The Trust will at all times invest money from the Contracts in such
a manner as to ensure that the Contracts will be treated as variable contracts
under the Code and the regulations issued thereunder. Without limiting the
scope of the foregoing, the Trust will at all times comply with Section 817(h)
of the Code and Treasury Regulation 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations. In the
event of a breach of this Article VI by a Fund, the Trust will take all
reasonable steps (a) to notify

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<PAGE>

Company of such breach and (b) to adequately diversify the Fund so as to achieve
compliance within the grace period afforded by Regulation 1.817-5.

ARTICLE VII. POTENTIAL CONFLICTS

7.1. The Board will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Trust. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Fund are being managed; (e) a difference in voting
instructions given by Variable Insurance Product owners; or (f) a decision by a
Participating Insurance Company to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.

7.2. The Company will report any potential or existing conflicts of which
it is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.

7.3. If it is determined by a majority of the Board, or a majority of its
disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested directors), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Trust or any Fund and reinvesting such assets in a different investment
medium, including (but not limited to) another Fund of the Trust, or submitting
the question whether such segregation should be implemented to a vote of all
affected Contract owners and, as appropriate, segregating the assets of any
appropriate group (I.E., annuity contract owners, life insurance policy owners,
or variable contract owners of one or more Participating Insurance Companies)
that votes in favor of such segregation, or offering to the affected contract
owners the option of making such a change; and (2) establishing a new registered
management investment company or managed separate account.

7.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position

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<PAGE>

or would preclude a majority vote, the Company may be required, at the Trust's
election, to withdraw the affected Account's investment in the Trust and
terminate this Agreement with respect to such Account (at the Company's
expense); provided, however that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board.

7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the position of the majority of other state regulators, then the Company will
withdraw the affected Account's investment in the Trust and terminate this
Agreement with respect to such Account within six months after the Board informs
the Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board. Until the end of the foregoing six month period, the Underwriter
and Trust shall continue to accept and implement orders by the Company for the
purchase (and redemption) of shares of the Trust.

7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Trust be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict.

7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Trust and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.

ARTICLE VIII. INDEMNIFICATION

8.1. INDEMNIFICATION BY THE COMPANY

8.1(a) The Company agrees to indemnify and hold harmless the Trust and
each member of the Board and each officer and employee of the Trust, the
Underwriter and each

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<PAGE>

director, officer and employee of the Underwriter, and each person, if any, who
controls the Trust, or the Underwriter within the meaning of Section 15 of the
1933 Act (collectively, an "Indemnified Parties" and individually, "Indemnified
Party," for purposes of this Section 8.1) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of the Company) or litigation (including legal and other expenses), to
which the Indemnified Parties may become subject under any statute, regulation,
at common law or otherwise, insofar as such losses, claims, damages,
liabilities, or expenses (or actions in respect thereof) or settlements are
related to the sale or acquisition of Fund shares or the Contracts and:

(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the
registration statement or prospectus or statement of additional
information for the Contracts or contained in the Contracts or sales
literature for the Contracts (or any amendment or supplement to any of
the foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or on behalf
of the Trust for use in the registration statement or prospectus or
statement of additional information for the Contracts or in the
Contracts or sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or
Trust shares; or

(ii) arise out of or as a result of statements or
representations (other than statements or representations contained in
the registration statement, prospectus, statement of additional
information or sales literature of the Trust not supplied by the
Company, or persons under its control and other than statements or
representations authorized by the Trust or the Underwriter) or
unlawful conduct of the Company or persons under its control, with
respect to the sale or distribution of the Contracts or Trust shares;
or

(iii) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in a
registration statement, prospectus, statement of additional
information or sales literature of the Trust or any amendment thereof
or supplement thereto or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading if such a statement or
omission was made in reliance upon and in conformity with information
furnished to the Trust by or on behalf of the Company; or

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<PAGE>

(iv) arise as a result of any failure by the Company to
provide the services and furnish the materials under the terms of this
Agreement; or

(v) arise out of or result from any material breach of any
representation or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this
Agreement by the Company, as limited by and in accordance with the
provisions of Sections 8.1(b) and 8.1(c) hereof.

8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.

8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.

8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Trust shares or the Contracts or the operation of
the Trust.

8.2. INDEMNIFICATION BY THE UNDERWRITER

8.2(a). The Underwriter agrees to indemnify and hold harmless the Company
and each of its directors, officers and employees and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, an "Indemnified Parties" and individually, "Indemnified Party,"
for purposes of this Section 8.2) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the

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<PAGE>

(Underwriter) or litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of shares of a Fund or the Contracts and:

(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained
in the registration statement, prospectus, statement of
additional information or sales literature of the Trust
(or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a
material fact required to be stated therein or
necessary to make the statements therein not
misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or
omission was made in reliance upon and in conformity
with information furnished to the Trust by or on behalf
of the Company for use in the registration statement,
prospectus, statement of additional information for the
Trust or in sales literature (or any amendment or
supplement) or otherwise for use in connection with the
sale of the Contracts or Fund shares; or

(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained in the registration
statement, prospectus, statement of additional
information or sales literature for the Contracts not
supplied by the Trust or persons under its control and
other than statements or representations authorized by
the Company) or unlawful conduct of the Trust,
Underwriter(s) or Underwriter or persons under their
control, with respect to the sale or distribution of
the Contracts or Fund shares; or

(iii) arise out of or as a result of any untrue statement or
alleged untrue statement of a material fact contained
in a registration statement, prospectus, statement of
additional information or sales literature covering the
Contracts, or any amendment thereof or supplement
thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein
or necessary to make the statement or statements
therein not misleading, if such statement or omission
was made in reliance upon information furnished to the
Company by or on behalf of the Trust; or

(iv) arise as a result of any failure by the Trust to
provide the services and furnish the materials under
the terms of this Agreement

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<PAGE>

(including a failure, whether unintentional, in good
faith or otherwise, to comply with the
diversification requirements specified in
Article VI); or

(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter
in this Agreement or arise out of or result from any
other material breach of this Agreement by the
Underwriter; as limited by and in accordance with the
provisions of Sections 8.2(b) and 8.2(c) hereof.

8.2(b). The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities, or
litigation incurred or assessed against an Indemnified Party as such may arise
from such Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's duties or by reason of
such Indemnified Party's reckless disregard of obligations and duties under this
Agreement.

8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.

8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.

8.3. INDEMNIFICATION BY THE TRUST

8.3(a). The Trust agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of

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<PAGE>

Section 15 of the 1933 Act (hereinafter collectively, the "Indemnified Parties"
and individually, "Indemnified Party," for purposes of this Section 8.3) against
any and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Trust) or litigation (including legal
and other expenses) to which the Indemnified Parties may become subject under
any statute, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
result from the gross negligence, bad faith or willful misconduct of the Board
or any member thereof, and are related to the operations of the Trust and:

(i) arise as a result of any failure by the Trust to
provide the services and furnish the materials under
the terms of this Agreement; or

(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Trust;

8.3(b). The Trust shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as may arise from such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.

8.3(c). The Trust shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Trust in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Trust of any such claim shall not
relieve the Trust from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Trust will be entitled to participate, at its own
expense, in the defense thereof. The Trust also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Trust to such party of the Trust's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Trust will not be liable to such
party under this Agreement for any legal or other expenses subsequently incurred
by such party independently in connection with the defense thereof other than
reasonable costs of investigation.

8.3(d). The Company agrees promptly to notify the Trust of the
commencement of any litigation or proceedings against it or any of its
respective officers or directors in connection with this Agreement, the issuance
or sale of the Contracts, with respect to the operation of either Account, or
the sale or acquisition of shares of the Trust.

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<PAGE>

ARTICLE IX. APPLICABLE LAW

9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the substantive laws of the State of
Delaware.

9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.

ARTICLE X. TERMINATION

10.1. This Agreement shall continue in full force and effect until the
first to occur of:

(a) termination by any party for any reason by sixty (60) days advance
written notice delivered to the other parties; or

(b) termination by the Company by written notice to the Trust and the
Underwriter with respect to any Fund based upon the Company's
determination that shares of such Fund are not reasonably available to
meet the requirements of the Contracts; or

(c) termination by the Company by written notice to the Trust and the
Underwriter with respect to any Fund in the event any of the Fund's
shares are not registered, issued or sold in accordance with
applicable state and/or federal law or such law precludes the use of
such shares as the underlying investment media of the Contracts issued
or to be issued by the Company; or

(d) termination by the Company by written notice to the Trust and the
Underwriter with respect to any Fund in the event that such Fund
ceases to qualify as a Regulated Investment Company under Subchapter M
of the Code or under any successor or similar provision, or if the
Company reasonably believes that the Trust may fail to so qualify; or

(e) termination by the Company by written notice to the Trust and the
Underwriter with respect to any Fund in the event that such Fund falls
to meet the diversification requirements specified in Article VI
hereof; or

(f) termination by either the Trust by written notice to the Company if
the Trust shall determine, in its sole judgment exercised in good
faith, that the Company and/or

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<PAGE>

its affiliated companies has suffered a material adverse change in its
business, operations, financial condition or prospects since the date
of this Agreement or is the subject of material adverse publicity, or

(g) termination by the Company by written notice to the Trust and the
Underwriter, if the Company shall determine, in its sole judgment
exercised in good faith, that either the Trust or the Underwriter has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or
is the subject of material adverse publicity; or

(h) termination by the Trust or the Underwriter by written notice to the
Company, if the Company gives the Trust and the Underwriter the
written notice specified in Section 1.6 hereof and at the time such
notice was given there was no notice of termination outstanding under
any other provision of this Agreement; provided, however any
termination under this Section 10.1(h) shall be effective forty five
(45) days after the notice specified in Section 1.6 was given.

10.2. Notwithstanding any termination of this Agreement, the Trust shall,
at the option of the Company, continue to make available additional shares of
the Trust pursuant to the terms and conditions of this Agreement, for all
Contracts in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing, Contracts"). Specifically, without
limitation, the owners of the Existing Contracts shall be permitted to direct
reallocation of investments in the Trust, redemption of investments in the Trust
and investment in the Trust upon the making of additional purchase payments
under the Existing Contracts. The parties agree that this Section 10.2 shall
not apply to any terminations under Article VII and the effect of such Article
VII terminations shall be governed by Article VII of this Agreement.

10.3. The Company shall not redeem Trust shares attributable to the
Contracts (as distinct from Trust shares attributable to the Company's assets
held in the Account) except (i) as necessary to implement Contract Owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the Securities and Exchange Commission pursuant to
Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish
to the Trust the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Trust) to the effect that any redemption pursuant
to clause (ii) above is a Legally Required Redemption. Furthermore, except in
cases where permitted under the terms of the Contracts, the Company shall not
prevent Contract Owners from allocating payments to a Fund that was otherwise
available under the Contracts without first giving the Trust 90 days prior
written notice of its intention to do so.

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<PAGE>

ARTICLE XI. NOTICES

Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.

If to the Trust:

Rydex Variable Trust
6116 Executive Boulevard, Suite 400
Rockville, MD 20852

If to Underwriter:

PADCO Financial Services, Inc.
6116 Executive Boulevard, Suite 400
Rockville, MD 20852

If to the Company:

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

ARTICLE XII. MISCELLANEOUS

12.1. All persons dealing with the Trust must look solely to the property
of the Trust for the enforcement of any claims against the Trust as neither the
Board, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Trust.

12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.

12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.

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<PAGE>

12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.

12.5. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.

12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.

12.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations
at law or in equity, which the parties hereto are entitled to under state and
federal laws.

12.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that an Underwriter may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company under common
control with the Underwriter, if such assignee is duly licensed and registered
to perform the obligations of the Underwriter under this Agreement.

12.9. The Company shall furnish, or shall cause to be furnished, to the
Trust or its designee copies of the following reports:

(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP"), if any), as
soon as practical and in any event within 90 days after the end
of each fiscal year;

(b) the Company's quarterly statements (statutory) (and GAAP, if
any), as soon as practical and in any event within 45 days after
the end of each quarterly period:

(c) any financial statement, proxy statement, notice or report of the
Company sent to stockholders and/or policyholders, as soon as
practical after the delivery thereof to stockholders;

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<PAGE>

(d) any registration statement (without exhibits) and financial
reports of the Company filed with the Securities and Exchange
Commission or any state insurance regulator, as soon as practical
after the filing thereof;

(e) any other report submitted to the Company by independent
accountants in connection with any annual, interim or special
audit made by them of the books of the Company, as soon as
practical after the receipt thereof.

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified above.

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

By:
------------------------------

RYDEX VARIABLE TRUST

By:
------------------------------

PADCO FINANCIAL SERVICES, INC.

By:
------------------------------

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<PAGE>

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

SCHEDULE A

SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS

Shares of the Funds of the Trust shall be made available as investments for
the following Separate Accounts:

NAME OF SEPARATE ACCOUNT AND FORM NUMBER AND NAME OF CONTRACT
DATE ESTABLISHED BY BOARD OF DIRECTORS FUNDED BY SEPARATE ACCOUNT

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<PAGE>

SCHEDULE B

PROXY VOTING PROCEDURES

The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Trust. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.

1. The proxy proposals are given to the Company by the Trust as early as
possible before the date set by the Trust for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of voting
instructions from owners of the Contracts and to facilitate the
establishment of tabulation procedures. At this time the Trust will inform
the Company of the Record, Mailing and Meeting dates. This will be done
verbally approximately two months before meeting.

2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.

Note: The number of proxy statements is determined by the activities
described in this Step #2. The Company will use its best efforts to call
in the number of Customers to the Trust , as soon as possible, but no later
than two weeks after the Record Date.

3. The Trust's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting,
instruction solicitation material. The Trust will provide the last Annual
Report to the Company pursuant to the terms of Section 3.3 of the Agreement
to which this Schedule relates.

4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Trust. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Trust or its
affiliate must approve the Card before it is printed. Allow approximately
2-4 business days for printing information on the Cards. Information
commonly found on the Cards includes:

a. name (legal name as found on account registration)
b. address
c. Trust or account number
d. coding to state number of units

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<PAGE>

e. individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Trust).

(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)

5. During this time, the Trust will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:

a. Voting Instruction Card(s)
b. one proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the Company
or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small, single
sheet of paper that requests Customers to vote as quickly as possible
and that their vote is important. One copy will be supplied by the
Trust.)
e. cover letter - optional, supplied by Company and reviewed and approved
in advance by the Trust

6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Trust.

7. Package mailed by the Company.
* The Trust must allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but NOT
including,) the meeting, counting backwards.

8. Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.

Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Trust in the past.

9. Signatures on Card checked against legal name on account registration which
was printed on the Card.

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<PAGE>

Note: For Example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.

10. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.

11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.

12. The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Trust receives the tabulations
stated in terms of a percentage and the number of SHARES.) The Trust must
review and approve tabulation format.

13. Final tabulation in shares is verbally given by the Company to the Trust on
the morning of the meeting not later than 10:00 a.m. Eastern time. The
Trust may request an earlier deadline if reasonable and if required to
calculate the vote in time for the meeting.

14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Trust will provide a standard form for each Certification.

15. The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Trust will be
permitted reasonable access to such Cards.

16. All approvals and "signing-off' may be done orally, but must always be
followed up in writing.

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<PAGE>

CUSTODY AGREEMENT

BETWEEN

THE RYDEX VARIABLE TRUST

AND

STAR BANK, N.A.

DATED AUGUST 11, 1998

<PAGE>

CUSTODY AGREEMENT

Agreement made as of the 11th day of August, 1998, between Rydex Variable
Trust (the "Trust"), a business trust organized under the laws of Delaware and
having its offices at 6116 Executive Boulevard, Suite 400, Rockville, Maryland,
20852 acting for and on behalf of all mutual fund portfolios as are currently
authorized and issued by the Trust or may be authorized and issued by the Trust
subsequent to the date of this Agreement (the "Funds"), which is operated and
maintained by the Trust for the benefit of the holders of shares of the Funds,
and Star Bank, N.A. (the "Custodian"), a national banking association having its
principal office and place of business at Star Bank Center, 425 Walnut Street,
Cincinnati, Ohio 45202, which Agreement provides for the furnishing of custodian
services to the Funds.

W I T N E S S E T H:

that for and in consideration of the mutual promises hereinafter set forth the
Trust, on behalf of the Funds, and the Custodian agree as follows:

ARTICLE I
DEFINITIONS

Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:

1. "Authorized Person" shall be deemed to include the Chairman,
President, Secretary, and the Vice President, or any other person, whether or
not any such person is an officer or employee of the Trust, duly authorized by
the Board of Trustees of the Trust to give Oral Instructions on behalf

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<PAGE>

of the Funds and listed in the Certificate annexed hereto as Appendix A or such
other Certificate as may be received by the Custodian from time to time, subject
in each case to any limitations on the authority of such person as set forth in
Appendix A or any such Certificate.

2. "Book-Entry System" shall mean the Federal Reserve/Treasury cook-entry
system for United states and federal agency securities, its successor or
successors and its nominee or nominees, provided the Custodian has received a
certified copy of a resolution of Board of Trustees of the Trust specifically
approving deposits in the Book-Entry System.

3. "Certificate" shall mean any notice, instruction or other instrument
in writing, authorized or required by this Agreement to be given to the
Custodian which is signed on behalf of the Funds by an Officer of the Trust and
is actually received by the Custodian.

4. "Depository" shall mean The Depository Trust company ("DTC"), a
clearing agency registered with the Securities and Exchange Commission, its
successor or successors and its nominee or nominees. The term "Depository"
shall further mean and include any other person or clearing agency authorized to
act as a depository under the Investment Company Act of 1940, its successor or
successors and its nominee or nominees, provided that the Custodian has received
a certified copy of a resolution of the Board of Trustees of the Trust
specifically approving such other person or clearing agency as a depository.

5. "Dividend and Transfer Agent" shall mean the dividend and transfer
agent active, from time to time, in such capacity pursuant to a written
agreement with the Fund changes in which the Trust shall immediately report to
the Custodian in writing.

6. "Money Market Security" shall be deemed to include, without limitation
debt obligations issued or guaranteed as to principal and/or interest by the
government of the United

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<PAGE>

States or agencies or instrumentalities thereof, commercial paper, obligations
(including certificates of deposit, bankers' acceptances, repurchase and reverse
repurchase agreements with respect to the same) and bank time deposits of
domestic banks that are members of Federal Deposit Insurance Trust, and short-
term corporate obligations where the purchase and sale of such securities
normally require settlement in federal funds or their equivalent on the same day
as such purchase or sale.

7. "Officers" shall be deemed to include the Chairman, the President, the
Secretary, and Vice President of the Trust listed in the Certificate annexed
hereto as Appendix A or such other Certificate as may be received by the
Custodian from time to time.

8. "Oral Instructions" shall mean oral instructions actually received by
the Custodian from an Authorized Person (or from a person which the Custodian
reasonably believes in good faith to be an Authorized Person) and confirmed by
Written Instructions from Authorized Persons in such manner so that such Written
Instructions are received by the Custodian on the next business day.

9. "Prospectus" or "Prospectuses" shall mean the Funds' currently
effective prospectuses and statements of additional information, as filed with
and declared effective by the Securities and Exchange Commission.

10. "Security or Securities" shall mean Money Market Securities, common or
preferred stocks, options, futures, gold, silver, bonds, debentures, corporate
debt securities, notes, mortgages or other obligations, and any certificates,
receipts, warrants or other instruments representing rights to receive, purchase
or subscribe for the same, or evidencing or representing any other rights or
interest therein, or any property or assets.

11. "Written Instructions" shall mean communication actually received by
the Custodian from one Authorized Person or from one person which the Custodian
reasonably believes in good

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<PAGE>

faith to be an Authorized Person in writing, telex or any other data
transmission system whereby the receiver of such communication is able to verify
by codes or otherwise with a reasonable degree of certainty the authenticity of
the senders of such communication.

ARTICLE II

APPOINTMENT OF CUSTODIAN

1. The Trust, acting for and on behalf of the Funds, hereby constitutes
and appoints the Custodian as custodian of all the Securities and monies at any
time owned by the Funds during the period of this Agreement ("Fund Assets").

2. The Custodian hereby accepts appointment as such Custodian and agrees
to perform the duties thereof as hereinafter set forth.

ARTICLE III

DOCUMENTS TO BE FURNISHED BY THE TRUST

The Trust hereby agrees to furnish to the Custodian the following
documents:

1. A copy of its Declaration of Trust (the "Declaration of Trust")
certified by its Secretary.

2. A copy of its By-Laws certified by its Secretary.

3. A copy of the resolution of its Board of Trustees appointing the
Custodian certified by its Secretary.

4. A copy of the most recent Prospectuses of the Trust.

-5-
<PAGE>

5. A Certificate of the President and Secretary setting forth the names
and signatures of the present Officers of the Trust.

ARTICLE IV

CUSTODY OF CASH AND SECURITIES

1. The Trust will deliver or cause to be delivered to the Custodian all
Fund Assets, including cash received for the issuance of its shares, at any time
during the period of this Agreement. The Custodian will not be responsible for
such Fund Assets until actually received by it. Upon such receipt, the
Custodian shall hold in safekeeping and physically segregate at all times from
the property of any other persons, firms or corporations all Fund Assets
received by it from or for the account of the Funds. Any credits from third
parties that are made to the Funds' account by the Custodian may be reverse if
the monies for them is not finally collected within 90 days from the day the
credits are made. The Custodian is hereby authorized by the Trust, acting on
behalf of the Funds, to actually deposit any fund Assets in the Book-Entry
System or in a Depository, provided, however, that the Custodian shall always be
accountable to the Trust for the Fund Assets so deposited. Funds Assets
deposited in the Book-Entry System or the Depository will be represented in
accounts which include only assets held by the Custodian for customers,
including but not limited to accounts in which the Custodian acts in a fiduciary
or representative capacity.

2. The Custodian shall credit to a separate account or accounts in the
name of each respective Fund all monies received by it for the account of such
Fund, and shall disburse the same only:

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<PAGE>

(a) In payment for Securities purchased for the account of such Fund, as
provided in Article V;

(b) In payment of dividends or distributions, as provided in Article VI
hereof;

(d) In payment for shares of such Fund redeemed by it, as provided in
Article VII hereof;

(e) Pursuant to Certificates (i) directing payment and setting forth the
name and address of the person to whom the payments is to be made, the
amount of such payment and the purpose for which payment is to be made
(the Custodian not being required to questions such direction) or (ii)
if reserve requirements are established for the Fund by law or by
valid regulation, directing the Custodian to deposit a specified
amount of collected funds in the form of U.S. dollars at a specified
Federal Reserve bank and stating the purpose of such deposit; or

(f) In reimbursement of the expenses and liabilities of the Custodian, as
provided in paragraph 10 of Article IX hereof.

3. Promptly after the close of business on each day the funds are open
and valuing their portfolios, the Custodian shall furnish the Trust with a
detailed statement of monies held for the Fund under this Agreement and with
confirmations and a summary of all transfers to or from the account of the Funds
during said day. Where securities are transferred to the account of the Fund
without physical delivery, the Custodian shall also identify as belonging to the
Funds a quantity of Securities in a rungible bulk of Securities registered in
the name of the Custodian (or its nominee) or shown on the Custodian's account
on the books of the Book-Entry System or the Depository.

-7-
<PAGE>

At least monthly and from time to time, the Custodian shall furnish the Trust
with a detailed statement of the Securities held for the Funds under this
Agreement.

4. All Securities held for the Funds, which are issued or issuable only
in bearer form, except such Securities as are held in the Book-Entry System,
shall be held by the Custodian in that form; all other Securities held for the
Funds may be registered nominee of the Custodian as the Custodian may from time
to time determine, or in the name of the Book-Entry System or the Depository or
their successor or successors, or their nominee or nominees. The Trust agrees
to furnish to the Custodian appropriate instruments to enable the Custodian to
hold or deliver in proper form for transfer, or to register in the name of its
registered nominee or in the name of the Book-Entry System or the Depository,
any Securities which it may hold for the account of the Funds and which may from
time to time be registered in the name of the Funds. The Custodian shall hold
all such Securities which are not held in the Book-Entry System by the
Depository or a Sub-Custodian in a separate account or accounts in the name of
the Funds segregated at all times from those of any other fund maintained and
operated by the Trust and from those of any other person or persons.

5. Unless otherwise instructed to the contrary by a Certificate, the
Custodian shall with respect to all Securities held for the Funds in accordance
with this Agreement:

(a) Collect all income due or payable to the Funds with respect to each
Fund's Assets;

(b) Present for payment and collect the amount payable upon all Securities
which may mature or be called, redeemed, or retired, or otherwise
become payable;

-8-
<PAGE>

(d) Execute, as Custodian, any necessary declarations or certificates of
ownership under the Federal income tax laws or the laws or regulations
of any other taxing authority, including any foreign taxing authority,
now or hereafter in effect; and

(e) Hold directly, or through the Book-Entry System or the Depository with
respect to Securities therein deposited, for the account of the Funds
all rights and similar securities issued with respect to any
Securities held by the Custodian hereunder.

6. Upon receipt of a Certificate and not otherwise, the Custodian
directly or through the use of the Book-Entry System or the Depository shall:

(a) Execute and deliver to such persons as may be designated in such
Certificate proxies, consents, authorizations, and any other
instruments whereby the authority or the Fund as owner of any
Securities may be exercised;

(b) Deliver any Securities held for the Funds in exchange for other
Securities or cash issued or paid in connection with the liquidation,
reorganization, refinancing, merger, consolidation or recapitalization
of any corporation, or the exercise of any conversion privilege;

(c) Deliver any Securities held for the account of the Funds to any
protective committee, reorganization, refinancing, merger,
consolidation, recapitalization or sale of assets of any corporation,
and received and hold under the terms of this Agreement such
certificates of deposit, interim receipts or other instruments or
documents as may be issued to it to evidence such delivery; and

(d) Make such transfers or exchanges of the assets of the Funds and take
such other steps as shall be stated in said Certificate to be for the
purpose of effectuating any duly

-9-
<PAGE>

authorized plan of liquidation, reorganization, merger, consolidation
or recapitalization of the Funds.

7. The Custodian shall promptly deliver to the Trust all notices, proxy
material and executed but unvoted proxies pertaining to shareholder meetings of
Securities held by the Funds. The Custodian shall not vote or authorized the
voting of any Securities or give any consent, waiver or approval with respect
thereto unless so directed by a Certificate or Written Instruction.

8. The Custodian shall promptly deliver to the Trust all material
received by the Custodian and pertaining to Securities held by the Funds with
respect to tender or exchange offers, calls for redemption or purchase,
expiration of rights, name changes, stock splits and stock dividends, or any
other activity involving ownership rights in such Securities.

ARTICLE V

PURCHASE AND SALE OF INVESTMENTS OF THE FUND

1. Promptly after each purchase of Securities by the Funds, the Trust
shall deliver to the Custodian (i) with respect to each purchase of Securities
which are not Money Market Securities, a Certificate or Written Instructions,
and (ii) with respect to each purchase of Money Market Securities, Written
Instructions, a Certificate or Oral Instructions, specifying with respect to
each such purchase: (a) The name of the issuer and the title of the Securities,
(b) the principal amount purchased and accrued interest, if any, (c) the date
of purchase and settlement, (d) the purchase price per unit, (e) the total
amount payable upon such purchase and (f) the name of the person from whom or
the broker through whom the purchase was made. The Custodian shall upon receipt
of Securities purchased by or for the Funds, pay out of the monies held for the
account of the Funds the

-10-
<PAGE>

total amount payable to the person from whom or the broker through whom the
purchase was made, provided that the same conforms to the total amount payable
as set forth in such Certificate, Written Instructions or Oral Instructions.

2. Promptly after each sale of Securities by the Trust for the account of
the Fund, the Trust shall deliver to the Custodian (i) with respect to each sale
of Securities which are not Money Market Securities, a Certificate or Written
Instructions, and (ii) with respect to each sale of Money Market Securities.
Written Instructions, a Certificate of Oral Instructions, specifying with
respect to each such sale: (a) the name of the issuer and the title of the
Security, (b) the principal amount sold, and accrued interest, if any, (c) the
date of sale, (d) the sale price per unit, (e) the total amount payable to the
Funds upon such sale and (f) the name of the broker through whom or the person
to whom the sale was made. The Custodian shall deliver the Securities upon
receipt of the total amount payable to the Funds upon such sale, provided that
the same conforms to the total amount payable as set forth in such Certificate.
written Instructions or Oral Instructions. Subject to the foregoing, the
Custodian may accept payment in such form as shall be satisfactory to it, and
may deliver Securities and arrange for payment in accordance with the customs
prevailing among dealers in Securities.

3. Promptly after the time as of which the Trust on behalf of a Fund,
either -

(a) writes an option on Securities or writes a covered put option in
respect of a Security; or

(b) notifies the Custodian that is obligations in respect of any put
or call option, as described in the Trust's Prospectus, require
that the Fund deposit

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<PAGE>

Securities or additional Securities with the Custodian,
specifying the type and value of Securities required to be so
deposited, or

(c) notifies the Custodian that is obligations in respect of any
other Security, as described in each Fund's respective
Prospectus, require that the Fund deposit Securities or
additional Securities with the Custodian, specifying the type and
value of Securities required to be so deposited, the Custodian
will cause to be segregated or identified as deposited, pursuant
to the Fund's obligations as set forth in such Prospectus,
Securities of such kinds and having such aggregate values as are
required to meet the Fund's obligations in respect thereof. The
Trust will provide to the Custodian, as of the end of each
trading day, the market value of each Fund's option liability if
any and the market value of its portfolio of common stocks.

4. On contractual settlement date, the account of each respective Fund
will be charged for all purchases settling on that day, regardless of whether or
not delivery is made. On contractual settlement date, sales proceeds will
likewise be credited to the account of such Fund irrespectively of delivery.

In the case of "sale fails," the Custodian may request the assistance of
the Funds in making delivery of the failed Security.

ARTICLE VI

PAYMENT OF DIVIDENDS OR DISTRIBUTIONS

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<PAGE>

1. The Trust shall furnish to the Custodian a copy of the resolution of
the Board of Trustees, certified by the Secretary, either (i) setting forth the
date of the declaration of any dividend or distribution in respect of shares of
the Funds, the date of payment thereof, the record date as of which Funds
shareholders entitled to payment shall be determined, the amount payable per
share to the Funds shareholders of record as of that date and the total amount
to be paid by the Dividend and Transfer Agent of the Funds on the payment date,
or (ii) authorizing the declaration of dividends and distributions in respect of
shares of the Funds on a daily basis and authorizing the Custodian to rely on
Written Instructions or a Certificate setting forth the date of the declaration
of any such dividend or distribution, the date of payment thereof, the record
date as of which Funds shareholders entitled to payment shall be determined, the
amount payable per share to Funds shareholders of record as of that date and the
total amount to be paid by the Dividend and Transfer Agent on the payment date.

2. Upon the payment date specified in such resolution. Written
Instructions or Certificate, as the case may be, the Custodian shall arrange for
such payments to be made by the Dividend and Transfer Agent out of monies held
for the account of the Funds.

ARTICLE VII

SALE AND REDEMPTION OF SHARES OF THE FUND

1. The Custodian shall receive and credit to the account of each Fund
such payments for shares of such Fund issued or sold from time to time as are
received from the distributor for the Fund's shares, from the Dividend and
Transfer Agent of the Fund, or from the Trust.

-13-
<PAGE>

2. Upon receipt of Written Instructions, the Custodian shall arrange for
payment of redemption proceeds to be made by the Dividend and Transfer Agent out
of the monies held for the account of the respective Fund in the total amount
specified in the Written Instructions.

3. Notwithstanding the above provisions regarding the redemption of any
shares of the Fund, whenever shares of the Funds are redeemed pursuant to any
check redemption privilege which may form time to time be offered by the Funds,
the Custodian, unless otherwise subsequently instructed by Written Instructions,
shall, upon receipt of any Written Instructions setting forth that the
redemption is in good form for redemption in accordance with the check
redemption procedure, honor the check presented as part of such check redemption
privilege out of the money held in the account of the Funds for such purposes.

ARTICLE VIII

INDEBTEDNESS

In connection with any borrowings, the Trust, on behalf of the Funds, will
cause to be delivered to the Custodian by a bank or broker (including the
Custodian, if the borrowing is from the Custodian), requiring Securities as
collateral for such borrowings, a notice or undertaking in the form currently
employed by any such bank or broker setting forth the amount which such bank or
broker will loan to the Funds against delivery of a stated amount of collateral.
The Trust shall promptly deliver to the Custodian a Certificate specifying with
respect to each such borrowing: (a) the name of the bank or broker, (b) the
amount and terms of the borrowing, which may set forth by incorporating by
reference an attached promissory note, duly endorsed by the Trust, acting on
behalf of the Fund, or other loan agreement, (c) the date and time, if known, on
which is to be entered into,

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<PAGE>

(d) the date on which the loan becomes due and payable, (e) the total amount
payable to the Fund on the borrowing date, (f) the market value of Securities
collateralizing the loan, including the name of the issuer, the title and the
number of shares or the principal amount of any particular Securities, and (g) a
statement that such loan is in conformance with the Investment Company Act of
1940 and the Fund's then current Prospectus. The Custodian shall deliver on the
borrowing date specified in a Certificate the specified collateral and the
executed promissory note, if any, against delivery by the lending bank or broker
of the total amount of the loan payable provided that the same conforms to the
total amount payable as set forth in the Certificate. The Custodian may, at the
option of the lending bank or broker, keep such collateral in its possession,
but such collateral shall be subject to all rights therein given the lending
bank or broker, by virtue of any promissory note or loan agreement. The
Custodian shall deliver in the manner directed by the Trust from time to time
such Securities as additional collateral as may be specified in a Certificate to
collateralized further any transaction described in this paragraph. The Trust
shall cause all Securities released form collateral status to be returned
directly to the Custodian and the Custodian shall receive from time to time such
return of collateral as may be tendered to it. In the event that the Trust
fails to specify in a Certificate or Written Instructions the name of the
issuer, the title and number of shares or the principal amount of any particular
Securities to be delivered as collateral by the Custodian, the Custodian shall
not be under any obligation to deliver any Securities. The Custodian may
require such reasonable conditions with respect to such collateral and its
dealings with third-party lenders as it may deem appropriate.

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<PAGE>

ARTICLE IX

CONCERNING THE CUSTODIAN

1. Except as otherwise provided herein, the Custodian shall not be liable
for any loss or damage, including counsel fees, resulting from its action or
omission to act otherwise, except for any such loss or damage arising out of its
negligence or willful misconduct. The Trust, on behalf of the Funds and only
from Fund Assets (or insurance purchase by the Trust with respect to its
liabilities on behalf of the Funds hereunder), shall defend, indemnify and hold
harmless the Custodian and its Trustees, Officers, Employees and Agents with
respect to any loss, claim, liability or cost (including reasonable attorneys'
fees) arising or alleged to arise from or relating to the Trust's duties with
respect to the Funds hereunder or any other action or inaction of the Trust or
its Trustees, Officers, Employees or Agents as to the Funds, except such as may
arise from the negligent action, omission or willful misconduct of the
Custodian, its Trustees, Officers, Employees or Agents. The Custodian shall
defend, indemnify and hold harmless the Trust and its Trustees, Officers,
Employees or Agents with respect to any loss, claim, liability or cost
(including reasonable attorneys fees) arising or alleged to arise from or
relating to the Custodian's duties with respect to the Funds hereunder or any
other action or inaction of the Custodian or its Trustees, Officers, Employees,
Agents, nominees or Sub-Custodians as to the Funds, except such as may arise
from the negligent action, omission or willful misconduct of the Trust, its
Trustees, Officers, Employees or Agents. The Custodian may, with respect to
questions of law apply for and obtain the advice and opinion of counsel to the
trust at the expense of the Funds, or of its own counsel at its own expense, and
shall be fully protected with respect to anything done or omitted by it in good
faith in conformity with the advice or opinion of counsel to the Trust, and
shall be similarly protected with respect to anything

-16-
<PAGE>

done or omitted by it in good faith in conformity with advice or opinion of its
counsel, unless counsel to the Funds shall, within a reasonable time after being
notified of legal advice received by the Custodian, having differing
interpretation of such question of law. The Custodian shall be liable to the
Trust for any proximate loss or damage resulting from the sue of the Book-Entry
System or any Depository arising by reason of any negligence, misfeasance or
misconduct on the part of the Custodian or any of its employees, agents,
nominees or Sub-Custodians but not for any special, incidental, consequential,
or punitive damages; provided, however, that nothing contained herein shall
preclude recovery by the Trust, on behalf of the Funds, of principal and of
interest to the date of recovery on, Securities incorrectly omitted from the
Fund's account or penalties imposed on the Trust, in connection with the Funds,
for any failures to deliver Securities.

In any case in which one party hereto may be asked to indemnify the other
or hold the other harmless, the party from whom indemnification is sought (the
"Indemnifying Party") shall be advised of all pertinent facts concerning the
situation in question, and the party claiming a right to indemnification (the
"Indemnified Party") will use reasonable care to identify and notify the
Indemnifying Party promptly concerning any situation which presents or appears
to present a claim for indemnification against the Indemnifying Party. The
Indemnifying Party shall have the option to defend the Indemnified Party against
any claim which may be the subject of the indemnification, and in the event the
Indemnifying Party so elects, such defense shall be conducted by counsel chosen
by the Indemnifying Party and satisfactory to the Indemnified Party and the
Indemnifying Party will so notify the Indemnified Party and thereupon such
Indemnifying Party shall take over the complete defense of the claim and the
Indemnifying Party shall sustain no further legal or other expenses in such
situation for which indemnification has been sought under this paragraph, except
the expenses

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<PAGE>

of any additional counsel retained by the Indemnified Party. In no case shall
any party claiming the right to indemnification confess any claim or make any
compromise in any case in which the other party has been asked to indemnify such
party (unless such confession or compromise is made with such other party's
prior written consent).

The obligations of the parties hereto under this paragraph shall survive
the termination of this Agreement.

2. Without limiting the generality of the foregoing, the Custodian,
acting in the capacity of Custodian hereunder, shall be under no obligation to
inquire into, and shall not be liable for:

(a) The validity of the issue of any Securities purchased by or for
the account of the Funds, the legality of the purchase thereof,
or the propriety of the amount paid therefor;

(b) The legality of the sale of any Securities by or for the account
of the Funds, or the propriety of the amount for which the same
are sold;

(d) The legality of the redemption of any shares of the Funds, or the
propriety of the amount to be paid therefor;

(e) The legality of the declaration or payment of any dividend by the
Trust in respect of shares of the Funds;

(f) The legality of any borrowing by the Trust, on behalf of the
Funds, using Securities as collateral;

-18-
<PAGE>

(g) The sufficiency of any deposit made pursuant to a Certificate
described in clause (ii) of paragraph 2(e) of Article IV hereof.

3. The Custodian shall not be liable for any money or collected funds in
U.S. dollars deposited in a Federal Reserve Bank in accordance with a
Certificate described in clause (ii) of paragraph 2(e) of Article IV hereof, nor
be liable for or considered to be the Custodian of any money, whether or not
represented by any check, draft, or other instrument for the payment of money,
received by it on behalf of the Funds until the Custodian actually receives and
collects such money directly or my the final crediting of the account
representing the Fund's interest at the Book-Entry System or Depository.

4. The Custodian shall not be under any duty or obligation to take action
to effect collection of any amount due to the Funds from the Dividend and
Transfer Agent of the Funds nor to take any action to effect payment or
distribution by the Dividend and Transfer Agent of the Funds of any amount paid
by the Custodian to the Dividend and Transfer Agent of the Funds in accordance
with this Agreement.

5. Income due or payable to the Funds with respect to Funds Assets will
be credited to the account of the Funds as follows:

(a) Dividends will be credited on the first business day following
payable date irrespective of collection.

(b) Interest on fixed rate municipal bonds and debt securities issued
or guaranteed as to principal and/or interest by the government
of the United States or agencies or instrumentalities thereof
(excluding securities issued by

-19-
<PAGE>

the Government National Mortgage Association) will be credited on
payable date irrespective of collection.

(c) Interest on fixed rate corporate debt securities will be credited
on the first business day following payable date irrespective of
collection.

6. Notwithstanding paragraph 5 of this Article IX, the Custodian shall
not be under any duty or obligation to take action to effect collection of any
amount, if the Securities upon which such amount is payable are in default, or
if payment is refused after due demand or presentation, unless and until (i) it
shall be directed to take such action by a Certificate and (ii) it shall be
assured to its satisfaction of reimbursement of its costs and expenses in
connection with any such action or, at the Custodian's option, prepayment.

7. The Custodian may appoint one or more financial or banking
institutions, as Depository or Depositories or as Sub-Custodian or
Sub-Custodians, including, but not limited to, banking institutions located in
foreign countries, of Securities and monies at any time owned by the Fund, upon
terms and conditions approved in a Certificate. Current Depository(s) and
Sub-Custodian(s) are noted in Appendix B. The Custodian shall not be relieved
of any obligation or liability under this Agreement in connection with the
appointment or activities of such Depositories or Sub-Custodians.

8. The Custodian shall not be under any duty or obligation to ascertain
whether any Securities at any time delivered to or held by it for the account of
the Funds are such as properly may be held by the Funds under the provisions of
the Declarations of Trust and the Trust's By-Laws.

9. The Custodian shall treat all records and other information relating
to the Trust, the Funds and the Funds' Assets as confidential and shall not
disclose any such records or information

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<PAGE>

to any other person unless (a) the Trust shall have consented thereto in writing
or (b) such disclosure is compelled by law.

10. The Custodian shall be entitled to receive and the Trust agrees to pay
to the Custodian, for the Fund's account from Fund Assets only, such
compensation as shall be determined pursuant to Appendix C attached hereto, or
as shall be determined pursuant to amendments to such Appendix approved by the
Custodian and the Trust, on behalf of the Funds. The Custodian shall e entitled
to charge against any money held by it for the accounts of the Funds the amount
of any loss, damage, liability or expense, including counsel fees, for which it
shall be entitled to reimbursement under the provisions of this Agreement as
determined by agreement of the Custodian and the Trust or by the final order of
any court or arbitrator having jurisdiction and as to which all rights of appeal
shall have expired. The expenses which the Custodian may charge against the
accounts of the Funds include, but are not limited to, the expenses of
Sub-Custodians incurred in settling transactions involving the purchase and sale
of Securities of the Fund.

11. The Custodian shall be entitled to rely upon any Certificate if such
reliance is made in good faith. The Custodian shall be entitled to rely upon
any Oral Instructions and any Written Instructions actually received by the
Custodian pursuant to Article IV or V hereof. The Trust agrees to forward to
the Custodian Written Instructions from Authorized Persons confirming Oral
Instructions in such manner so that such Written Instructions are received by
the Custodian, whether by hand delivery, telex or otherwise, or the first
business day following the day on which such Oral Instructions are given to the
Custodian. The Trust agrees that the fact that such confirming instructions are
not received by the Custodian shall in no way affect the validity of the
transactions or enforceability of the transactions hereby authorized by the
Trust. The Trust agrees that the

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<PAGE>

Custodian shall incur no liability to the Funds in acting upon Oral Instructions
given to the Custodian hereunder concerning such transactions.

12. The Custodian will (a) set up and maintain proper books of account and
complete records of all transactions in the accounts maintained by the Custodian
hereunder in such a manner as will meet the obligations of the Funds under the
Investment Company Act of 1940, with particular attention to Section 31 thereof
and Rules 31a-1 and 31a-2 thereunder, and (b) preserve for the periods
prescribed by applicable Federal statute or regulation all records required to
be so preserved. The books and records of the Custodian shall be open to
inspection and audit at reasonable times and with prior notice by Officers and
auditors employed by the Trust.

13. The Custodian and its Sub-Custodians shall promptly send to the Trust,
for the account of the Funds, any report received on the systems of internal
accounting control of the Book-Entry System or the Depository and with such
reports on their own systems of internal accounting control as the Trust may
reasonably request from time to time.

14. The Custodian performs only the services of a custodian and shall have
no responsibility for the management, investment or reinvestment of the
Securities from time to time owned by the Funds. The Custodian is not a selling
agent for shares of the Funds and performance of its duties as a custodial agent
shall not be deemed to be a recommendation to the Custodian's depositors or
others of shares of the Funds as an investment.

ARTICLE X

TERMINATION

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<PAGE>

1. Either of the parties hereto may terminate this Agreement for any
reason by giving to the other party a notice in writing specifying the date of
such termination, which shall be not less than ninety (90) days after the date
of giving of such notice. If such notice is given by the Trust, on behalf of
the Fund, it shall be accompanied by a copy of a resolution of the Board of
Trustees of the Trust, certified by the Secretary or any Assistant Secretary,
electing to terminate this Agreement and designating a successor custodian or
custodians, each of which shall be a bank or trust company having not less than
$2,000,000 aggregate capital, surplus and undivided profits, or any other entity
satisfying the requirements of the 1940 Act. In the event such notice is given
by the Custodian, the Trust shall on or before the termination date, deliver to
the Custodian a copy of a resolution of its Board of Trustees, certified by the
Secretary, designating a successor custodian or custodians to act on behalf of
the Funds. In the absence of such designation by the Trust, the Custodian may
designate a successor custodian which shall be a bank or trust company having
not less than $2,000,000 aggregate capital, surplus, and undivided profits, or
any other entity satisfying the requirements of the 1940 Act. Upon the date set
forth in such notice this Agreement shall terminate, and the Custodian, provided
that it has received a notice of acceptance by the successor custodian, shall
deliver, on that date, directly to the successor custodian all Securities and
monies then owned by the Funds and held by it as Custodian. Upon termination of
this agreement the Trust shall pay to the Custodian on behalf of the Funds such
compensation as may be due as of the date of such termination. The Trust agrees
on behalf of the Funds that the Custodian shall be reimbursed for its reasonable
costs in connection with the termination of this Agreement.

2. If a successor custodian is not designated by the Trust, on behalf of
the Funds, or by the Custodian in accordance with the preceding paragraph, or
the designated successor cannot or will

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<PAGE>

not serve, the Trust shall upon the delivery by the Custodian to the Trust of
all Securities (other than Securities held in the Book-Entry System which cannot
be delivered to the Trust) and monies then owned by the Funds, other than monies
deposited with a Federal Reserve Bank pursuant to a Certificate described in
clause (ii) of paragraph 2(e) of Article IV, be deemed to be the custodian for
the Funds, and the Custodian shall thereby be relieved of all duties and
responsibilities pursuant to this Agreement, other than the duty with respect to
Securities held in the Book-Entry System which cannot be delivered to the Trust
to hold such Securities hereunder in accordance with this Agreement.

ARTICLE XI

MISCELLANEOUS

1. Appendix A sets forth the names and the signatures of all Authorized
Persons. The Trust agrees to furnish to the Custodian, on behalf of the Funds,
a new Appendix A in form similar to the attached Appendix A, if any present
Authorized Person ceases to be an Authorized person or if any other or
additional Authorized Persons are elected or appointed. Until such new appendix
A shall be received, the Custodian shall be fully protected in acting under the
provisions of this Agreement upon Oral Instructions or signatures of the present
Authorized Persons as set forth in the last delivered Appendix A.

2. No recourse under any obligation of this Agreement or for any claim
based thereon shall be had against any organizer, shareholder, Officer, Trustee,
past, present or future as such of the Trust or of any such predecessor
successor, whether by virtue of any constitution, statute or rule of law or
equity, or by the enforcement of any assessment or penalty or otherwise; it
being expressly agreed and understood that this Agreement and the obligations
thereunder are enforceable solely

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<PAGE>

against Fund Assets, and that no such personal liability whatever shall attach
to, or is or shall be incurred by, the organizers, shareholders, Officers,
Trustees of the Trust or of any predecessor or successor, or any of them as
such, because of the obligations contained in
this Agreement or impled therefrom and that any and all such liability is hereby
expressly waived and released by the Custodian as a condition of, and as a
consideration for, the execution of this Agreement.

3. The obligations set forth in this Agreement as having been made by the
Trust have been made by the Trustees of the Trust, acting as such Trustees for
and on behalf of the Funds, pursuant to the authority vested in them under the
laws of the State of Delaware, the Declaration of Trust and the By-Laws of the
Trust. This Agreement has been executed by Officers of the Trust as Officers,
and not individually, and the obligations contained herein are not binding upon
any of the Trustees, Officers, Agents or holders of shares, personally, but bind
only the Trust and then only to the extent of the Fund Assets.

4. Such provisions of the Prospectuses of the Funds and any other
documents (including advertising material) specifically mentioning the Custodian
(other than merely by name and address) shall be reviewed with the Custodian by
the Trust.

5. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at Star
Bank Center, 425 Walnut Street, M.L. 5127, Cincinnati, Ohio 45202, attention:
Mutual Fund Custody Department, or at such other place as the Custodian may from
time to time designate in writing.

6. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Trust shall be sufficiently given when
delivered to the Trust or on the second

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<PAGE>

business day following the time such notice is deposited in the U.S. mail
postage prepaid and addressed to the trust at its office at 6116 Executive
Boulevard, Suite 400, Rockville, Maryland, 20852 or at such other place as the
Trust may from time to time designate in writing.

7. This Agreement with the exception of Appendices A & B may not be
amended or modified in any manner except by a written agreement executed by both
parties with the same formality as this Agreement, and authorized and approved
by a resolution of the Board of Trustees of the Trust.

8. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Trust or by the Custodian, and not
attempted assignment by the Trust or the Custodian shall be effective without
the written consent of the other party hereto.

9. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective Officers, thereunto duly authorized as of the day
and year first above written.

ATTEST: Rydex Variable Trust

By:
- -------------------------- --------------------------

ATTEST: Star Bank, N.A.

By:
- -------------------------- --------------------------

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<PAGE>

APPENDIX A

AUTHORIZED PERSONS SPECIMEN SIGNATURES
------------------ -------------------

Controller: Thomas Reed
-------------------
Assistant Controller: Scott Whaley
-------------------
Senior Portfolio Accountant: Catharine Frisk
-------------------
Portfolio Accountant: Monica Kaur
-------------------
Portfolio Accountant: Stacey Pierre
-------------------

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<PAGE>

APPENDIX B

The following Depository(s) and Sub-Custodian(s) are employed currently by
Star Bank, N.A., for securities processing and control:

The Depository Trust Company (New York)
7 Hanover Square
New York, NY 10004

The Federal Reserve Bank
Cincinnati and Cleveland Branches

Bankers Trust Company
16 Wall Street
New York, NY 10005

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<PAGE>

APPENDIX C
STAR BANK, N.A.
CUSTODY TRANSACTION FEE SCHEDULE

Star Bank, N.A., as Custodian, will receive monthly compensation for services
according to the terms of the following schedule:

I. PORTFOLIO TRANSACTION FEES:
a) For each repurchase agreement transaction $ 7.00

b) For each portfolio transaction processed 11.00
through DTC or Federal Reserve

c) For each portfolio transaction processed 25.00
through our New York custodian

d) For each GNMA/Amortized Security Purchase 25.00

e) For each GNMA Prin/ Int Paydowns, GNMA Sales 8.00

f) For each option/future contract written, exercise 25.00

g) For each Cedel/Euroclear transaction 100.00

h) For each Disbursement (Fund expenses only) 5.00

A TRANSACTION IS A PURCHASE/SALE OF A SECURITY, FREE RECEIPT/FREE DELIVERY
(EXCLUDES INITIAL CONVERSION), MATURITY, TENDER OR EXCHANGE.

II. MONTHLY BASE FEE - PER FUND
First 4 months: 100.00
Second 4 months: 200.00
Third 4 months: 300.00
First Year Anniversary
and thereafter: 400.00

III. OUT-OF-POCKET EXPENSES
Star Bank shall be reimbursed for all out-of-pocket expenses including, but
not limited to, postage, insurance and long distance telephone charges.

IV. IRA DOCUMENTS 8.00
Per shareholder/year to hold each IRA document.

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<PAGE>

V. EARNINGS CREDITS
On a monthly basis any earnings credits generated from uninvested custody
balances will be first applied against any cash management service fees and
then to custody transaction fees (as referenced in item #1 above).
Earnings credits are based on the average yield of the 91 day U.S. Treasury
Bill for the preceding thirteen weeks less the 10% reserve.
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<PAGE>

SERVICE AGREEMENT

THIS SERVICE AGREEMENT (the "Agreement"), dated as of August 11, 1998, is
entered into by and between RYDEX VARIABLE TRUST, a Delaware business trust (the
"Trust"), and PADCO SERVICE COMPANY, INC., a Maryland corporation (the
"Servicer").

W I T N E S S E T H:

WHEREAS, the Trust is an investment company registered under the Investment
Company Act of 1940, as amended (the "'1940 Act");

WHEREAS, the Servicer is registered as a transfer agent under the
Securities Exchange Act of 1934, as amended; and

WHEREAS, the Trust wishes to have the Servicer perform general
administrative, shareholder, dividend disbursement, transfer agent, and
registrar and other services for the Trust and to act in such capacity in the
manner set forth in this Agreement, and the Servicer is willing to act in such
capacity in accordance with the provisions of this Agreement.

1. SERVICES TO BE PROVIDED.

In consideration of the compensation to be paid by the Trust to the
Servicer pursuant to Section 4 of this Agreement, the Servicer will:

a. Manage, supervise, and conduct the affairs and business of the Trust
and matters incidental thereto. In the performance of its duties, the Servicer
will comply with the Trust's

<PAGE>

Prospectus and its Statement of Additional Information, as the same may be
amended from time to time, all as delivered to the Servicer (collectively, the
"Controlling Documents"). The Servicer will also use its best efforts to
safeguard and promote the welfare of the Trust, and to comply with other
policies which the Board of Trustees of the Trust (the "Board") may from time to
time specify. The Servicer will furnish or provide to the Trust general
administrative services as the Trust may reasonably require in the conduct of
its affairs and business, including, without limitation, the services described
on Schedule I attached hereto.

b. Provide the Trust with all required shareholder and dividend
disbursement services, including, without limitation, those services described
on Schedule II, attached hereto. The Servicer will maintain sufficient trained
personnel and equipment and supplies to perform such services in conformity with
the Controlling Documents and such other reasonable standards of performance as
the Trust may from time to time specify, and otherwise in an accurate, timely,
and efficient manner.

c. Provide the Trust with all required stock transfer agent and registrar
services, including, without limitation, those services described on
Schedule III attached hereto. The Servicer will maintain sufficient trained
personnel and equipment and supplies to perform such services in conformity with
the Controlling Documents and such other reasonable standards of performance as
the Trust may from time to time specify, and otherwise in an accurate, timely,
and efficient manner.

2. OBLIGATIONS OF THE TRUST.

The Trust will have the following obligations under this Agreement:

a. The Trust shall keep the Servicer continuously and fully informed as
to the composition of the Trust's investment portfolio and the nature of all of
the Trust's assets and liabilities,

2
<PAGE>

and shall cause the investment managers of the Trust's series to cooperate with
the Servicer in all matters so as to enable the Servicer to perform the
Servicer's functions under this Agreement.

b. The Trust shall furnish the Servicer with any materials or information
which the Servicer may reasonably request to enable the Servicer to perform the
Servicer's functions under this Agreement.

c. The Trust shall turn over to the Servicer the accounts and records
previously maintained by or for the Trust. The Servicer shall be entitled to
rely exclusively on the completeness and correctness of the accounts and records
turned over to the Servicer by the Trust; provided, that such reliance is made
in good faith, and the Trust shall indemnify and hold the Servicer harmless of
and from any and all expenses (including, without limitation, attorneys' and
accountants' fees), damages, claims, suits, liabilities, actions, demands, and
losses whatsoever arising out of or in connection with any error, omission,
inaccuracy, or other deficiency of such accounts and records or in connection
with the failure of the Trust to provide any portion of such accounts and
records or to provide any information to the Servicer necessary or appropriate
to perform the Servicer's functions hereunder; and provided, further, that such
accounts, records, and other information shall belong to the Trust and be
considered confidential, and shall not be disclosed to other than Federal and
state regulators without permission from the Trust.

3. PAYMENT OF FEES AND EXPENSES.

a. The Servicer will pay all of the fees and expenses incurred by the
Servicer in providing the Trust with the services and facilities described in
this Agreement, except as otherwise provided herein.

3
<PAGE>

b. Notwithstanding any other provision of this Agreement, the Trust will
pay, or reimburse the Servicer for the payment of, all fees and expenses
incurred by the Servicer not directly related to the Servicer's providing the
Trust with the services and facilities described in this Agreement, including,
but not limited to, the following described fees and expenses of the Trust
(hereinafter called "Direct Expenses") whether or not billed to the Trust, the
Servicer, or any related entity:

(i) fees and expenses relating to investment advisory services;

(ii) fees and expenses of custodian and depositories and banking
services fees and costs;

(iii) fees and expenses of outside legal counsel and any legal
counsel directly employed by the Trust;

(iv) fees and expenses of independent auditors and income tax
preparation and expenses of obtaining quotations for the
purpose of calculating the value of the Trust's assets;

(v) fees and expenses of consultants;

(vi) interest charges;

(vii) all Federal, state, and local taxes (including, without
limitation, stamp, excise, income, and franchise taxes);

(viii)costs of stock certificates and other expenses of issuing
and redeeming shares of the Trust ("Shares");

(ix) costs incidental to or associated with shareholder
meetings;

(x) fees and expenses of registering or qualifying shares for
sale under Federal and state securities laws;

(xi) costs (including postage) of printing and mailing
prospectuses, confirmations, proxy statements, and other
reports and notices to shareholders and to governmental
agencies;

4
<PAGE>

(xii) premiums on all insurance and bonds and other expenses of
fidelity and liability insurance and bonding covering the
Trust;

(xiii)fees and expenses of the disinterested Trustees and
expenses incidental to the meetings of the Board;

(xiv) fees and expenses paid to any securities pricing
organization;

(xv) dues and expenses associated with membership in the
Investment Company Institute and the Mutual Fund Education
Alliance;

(xvi) costs for incoming telephone WATS lines; and

(xvii)organizational costs.

4. COMPENSATION.

As consideration for the services provided hereunder, the Trust will pay
the Servicer a fee on the last day of each month in which this Agreement is in
effect, at the following annual rates based on the average daily net assets (the
"Assets") of each of the Trust's series for such month:

<TABLE>
<S> <C>
Nova Fund . . . . . . . . . . . . . . 0.25%
Ursa Fund . . . . . . . . . . . . . . 0.25%
OTC Fund. . . . . . . . . . . . . . . 0.20%
Arktos Fund. . . . . . . . . . . . . . 0.25%
Precious Metals Fund . . . . . . . . . 0.20%
U.S. Government Bond Fund. . . . . . . 0.20%
Juno Fund . . . . . . . . . . . . . . 0.25%
U.S. Government Money Market Fund. . . 0.20%
Banking Fund . . . . . . . . . . . . . 0.25%
Basic Materials Fund . . . . . . . . . 0.25%
Biotechnology Fund . . . . . . . . . . 0.25%
Consumer Products Fund . . . . . . . . 0.25%
Electronics Fund . . . . . . . . . . . 0.25%
Energy Fund. . . . . . . . . . . . . . 0.25%
Energy Services Fund . . . . . . . . . 0.25%
Financial Services Fund. . . . . . . . 0.25%
Health Care Fund . . . . . . . . . . . 0.25%
Leisure Fund . . . . . . . . . . . . . 0.25%
Retailing Fund . . . . . . . . . . . . 0.25%

5
<PAGE>

Technology Fund. . . . . . . . . . . . 0.25%
Telecommunications Fund. . . . . . . . 0.25%
Transportation Fund. . . . . . . . . . 0.25%
</TABLE>

In the event that this Agreement commences on a date other than on the
beginning of any calendar month, or if this Agreement terminates on a date other
than the end of any calendar month, the fees payable hereunder by the Trust
shall be proportionately reduced according to the number of days during such
month that services were not rendered hereunder by the Servicer.

5. REPORTS TO THE BOARD OF TRUSTEES.

The Servicer will consult with the Board at such times as the Board
reasonably requests with respect to the services provided hereunder, and the
Servicer will cause its officers to attend such meetings with the Board, and to
furnish such oral or written reports to the Board, as the Board may reasonably
request. In addition, the Servicer agrees to provide to the Board such reports
and other information as the Board may reasonably request in order to enable the
Board to perform a review of the Servicer's performance under this Agreement.

6. TERM OF AGREEMENT.

This Agreement shall become effective as of the date the Trust commences
its investment operations and shall continue for an initial two-year term and
shall continue automatically from year-to-year thereafter unless terminated in
accordance with the provisions of Section 7 of this Agreement.

6
<PAGE>

7. TERMINATION.

This Agreement may be terminated, without the payment of any penalty, by
either party hereto upon at least sixty (60) days' written notice to the other
party. Any termination by the Trust will be pursuant to a vote of a majority of
the Trustees.

8. STANDARD OF CARE.

a. Except as provided by law, the Servicer will be under no liability or
obligation to anyone with respect to any failure on the part of the Board or any
investment manager to perform any of their obligations under the Controlling
Documents, or for any error or omission whatsoever on the part of the Board or
any investment manager.

b. The Servicer will not be liable for any error of judgment or mistake
of law or for any loss caused by the Trust in connection with the matters to
which this Agreement relates; provided, however, that the Servicer has acted in
the premises with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in like capacity and
familiar with such matters would use in the conduct of any enterprise of a like
character and with like aims, and in accordance with such other requirements of
law; provided, further, however, that nothing in this Agreement will protect the
Servicer against any liability to the Trust to which the Servicer would
otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of the Servicer's duties hereunder or by reason of
the Servicer's reckless disregard of the Servicer's obligations and duties
hereunder.

7
<PAGE>

9. OTHER ACTIVITIES OF THE SERVICER.

Subject to the provisions of Section 5 of this Agreement, with respect to
advance notice of the Servicer's taking on of new clients or ventures of
material significance, nothing herein contained will limit or restrict the right
of the Servicer to engage in any other business or to render services of any
kind to any other corporation, firm, individual, or association.

10. SCOPE OF AUTHORITY.

a. Shares purchased by the Servicer on behalf of shareholders of the
Trust ("Shareholders") will be registered with the Servicer, as the Trust's
transfer agent, in the Servicer's name or in the name of the Servicer's nominee.
The Shareholder will be the beneficial owner of Shares purchased and held by the
Servicer in accordance with the Shareholder's instructions and the Shareholder
may exercise all rights of a Shareholder of the Trust.

b. Neither the Servicer nor any of the Servicer's officers, employees,
agents, or assigns are authorized to make any representations concerning the
Trust or the Shares, except for those representations contained in the Trust's
then-current prospectus for such Shares, copies of which will be supplied by the
Trust to the Servicer, or in such supplemental literature or advertising as may
be authorized by the Trust in writing.

11. AUTHORITY TO ENGAGE SUB-SERVICERS.

In providing the services and assuming the obligations set forth herein,
the Servicer may, at the sole expense of the Servicer, employ one or more
sub-servicers, or may enter into such service agreements as the Servicer deems
appropriate in connection with the performance of the Servicer's duties and
obligations hereunder. Reference herein to the duties and responsibilities of
the Servicer

8
<PAGE>

shall include the duties and responsibilities of any sub-servicers employed
by the Servicer to the extent that the Servicer shall delegate such duties
and responsibilities to such sub-servicer.

12. INDEMNIFICATION.

a. The Trust shall indemnify the Servicer and hold the Servicer harmless
from and against all actions, suits, and claims, whether groundless or
otherwise, arising directly or indirectly out of or in connection with the
Servicer's performance under this Agreement and from and against any and all
losses, damages, costs, charges, attorneys' and accountant's fees, payments,
expenses, and liabilities incurred by the Servicer in connection with any such
action, suit, or claim unless caused by the Servicer's breach of this Agreement,
negligence, or willful misconduct. The Servicer shall not be under any
obligation to prosecute or to defend any action, suit, or claim arising out of
or in connection with the Servicer's performance under this Agreement, which, in
the opinion of the Servicer's counsel, may involve the Servicer in expense or
liability, and the Trust shall, so often as reasonably requested, furnish the
Servicer with satisfactory indemnity against such expense or liability, and upon
request of the Servicer, the Trust shall assume the entire defense of any
action, suit, or claim subject to the foregoing indemnity; PROVIDED, HOWEVER,
that the Servicer shall give the Trust immediate notice of any such action,
suit, or claim brought against the Servicer.

b. The Servicer shall indemnify the Trust and hold the Trust harmless
from all claims and liabilities (including reasonable attorneys' and
accountants' expenses) incurred or assessed against the Trust arising from the
Servicer's negligence, wilful misconduct, or breach of this Agreement.

9
<PAGE>

13. NOTICES.

a. Communications to the Servicer from the Trust or the Board shall be
addressed to:

Rydex Variable Trust
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
Attention: President

b. Communications from the Servicer to the Trust shall be addressed to:

PADCO Service Company, Inc.
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
Attention: President

c. In the event of a change of address, communications will be addressed
to such new address as designated in a written notice from the Trust or the
Servicer, as the case may be. All communications addressed in the above manner
and by registered mail or delivered by hand will be sufficient under this
Agreement.

14. LAW GOVERNING.

This Agreement is governed by the laws of the State of Maryland (without
reference to such state's conflict of law rules).

15. COUNTERPARTS.

This Agreement may be executed in counterparts, each of which shall be
deemed an original, but which together shall constitute one and the same
instrument.

10
<PAGE>

16. BINDING EFFECT AND ASSIGNMENT.

This Agreement shall be binding upon the parties hereto and their
respective successors and assigns; PROVIDED, HOWEVER, that this Agreement shall
not be assignable by the Trust without the written consent of the Servicer, or
by the Servicer without the written consent of the Trust, in each case
authorized or approved by a resolution of the Trust's Trustees.

17. AMENDMENT, MODIFICATION, AND WAIVER.

No term or provision of this Agreement may be amended, modified, or waived
without the affirmative vote or action by written consent of the Servicer and
the Trust.

IN WITNESS WHEREOF, the Servicer and the Trust have executed this Agreement
as of the date first written above.

RYDEX SERIES TRUST

By:
----------------------------
Name:
-----------------------
Title:
----------------------

PADCO SERVICE COMPANY, INC.

By:
----------------------------
Name:
-----------------------
Title:
----------------------

11
<PAGE>
SCHEDULE I

GENERAL ADMINISTRATIVE SERVICES

The Servicer agrees to provide the Trust with all required general
administrative services, including, without limitation, the following:

1. Office space, equipment, and personnel.

2. Clerical and general back office services.

3. Bookkeeping, internal accounting, secretarial, and other general
administrative services.

4. Preparation of all reports, prospectuses, statements of additional
information, proxy statements, and all other materials required to be
filed or furnished by the Trust under Federal and state securities
laws.

5. Maintaining ledgers and determining net asset values.

I-1

<PAGE>

SCHEDULE II

SHAREHOLDER AND DIVIDEND, DISBURSEMENT SERVICES

The Servicer agrees to provide the Trust and the Shareholders with all
required shareholder and dividend disbursement services ("Services"), including,
without limitation, the following:

1. The Servicer shall provide the following services to the Shareholders of
the Trust:

a. Aggregating and processing purchases and redemption requests for Trust
Shares from Shareholders.

b. Processing dividend payments from the Trust on behalf of Shareholders.

c. Providing information periodically to Shareholders showing their
positions in Shares.

d. Arranging for bank wires.

e. Responding to Shareholder inquiries relating to the services performed
by the Servicer.

f. Providing subaccounting with respect to Shares beneficially owned by
Shareholders.

g. As required by law, forwarding shareholder communications from the
Trust (such as proxies, shareholder reports, annual and semi-annual
financial statements, and dividend, disbursement, and tax notices) to
Shareholders.

h. Providing such other similar services as the Trust may reasonably
request to the extent the Servicer is permitted to do so under
applicable statues, rules, or regulations.

i. Provide to Shareholders a schedule of any fees that the Servicer may
charge directly to the Shareholders for such Services.

2. The Servicer shall also provide the following additional Services:

a. Maintain all records required by law relating to transactions in
Shares and, upon request by the Trust, promptly make such of these
records available to the Trust as the Trust may reasonably request in
connection with the operations of the Trust.

b. Promptly notify the Trust if the Servicer experiences any difficulty
in maintaining the records described in this Schedule II to the
Agreement in an accurate and complete manner.

<PAGE>

c. Furnish the Trust or any designee of the Trust ("Designee") with such
information relating to the Servicer's performance under this
Agreement as the Trust or the Designee may reasonably request
(including, without limitation, periodic certifications confirming the
provision to Shareholders of the Services described herein), and shall
otherwise cooperate with the Trust and the Trust's Designees
(including, without limitation, any auditors designated by the Trust),
in connection with the preparation of reports to the Board of Trustees
concerning this Agreement and the monies paid or payable by the Trust
pursuant hereto, as well as any other reports or filings that may be
required by law.

II-2

<PAGE>

SCHEDULE III

TRANSFER AGENT AND REGISTRAR SERVICES

The Servicer agrees to provide the Trust with all required transfer agent
and registrar services, including, without limitation, the following:

1. Maintaining all shareholder accounts, including processing of new
accounts.

2. Posting address changes and other file maintenance for shareholder
accounts.

3. Posting all transactions to the shareholder file, including:

- Direct purchases
- Wire order purchases
- Direct redemptions
- Wire order redemptions
- Draft redemptions
- Direct exchanges
- Transfers

4. Quality control reviewing of every transaction before the mailing of
confirmations, checks, and/or certificates to shareholders.

5. Issuing all checks and shipping and replacing lost checks.

6. Mailing confirmations, checks, and/or certificates resulting from
transaction requests of shareholders.

7. Performing other mailings, including:

- Semi-annual and annual reports
- I.R.S. Form 1099/year-end shareholder reporting
- Systematic withdrawal plan payments
- Daily confirmations

8. Answering all service-related telephone inquiries from shareholders,
including:

- General and policy inquiries (research and resolve problems)
- Trust yield inquiries
- Taking shareholder processing requests and account maintenance
changes by telephone
- Submitting pending requests to correspondence
- Monitoring online statistical performance of shares
- Developing reports on telephone activity

<PAGE>

ACCOUNTING SERVICES AGREEMENT

BETWEEN

THE RYDEX VARIABLE TRUST

AND

PADCO SERVICE COMPANY, INC.

<PAGE>

This Agreement, dated the 11th day of August, 1998, made by and between the
RYDEX VARIABLE TRUST (the "Trust"), a business trust established under the laws
of the State of Delaware on June 11, 1998, and organized as an open-end
management investment company, and PADCO SERVICE COMPANY, INC. (the "Agent"),
a company incorporated under the laws of the State of Maryland on October 6,
1993.

W I T N E S S E T H:

WHEREAS, the Agent is registered with the Commission as a transfer agent
under the Securities Exchange Act of 1934, as amended;

WHEREAS, the Agreement and Declaration of Trust of the Trust (the "Trust
Declaration") authorizes the Trustees of the Trust to create an unlimited number
of series of shares of the Trust.

WHEREAS, the Trust desires to appoint the Agent as the Trust's Accounting
Services Agent and the Accounting Services Agent for each of the Funds and
desires to have the Agent, as said Accounting Services Agent, to perform certain
accounting and recordkeeping functions required of a duly-registered investment
company; to file certain financial reports; to maintain and preserve certain
books, accounts, and records as the basis for such reports; and to perform
certain daily functions in connection with such accounts and records; and

WHEREAS, the Agent is willing to perform such functions upon the terms and
conditions herein set forth.

-2-
<PAGE>

1. ACCOUNTS AND RECORDS OF THE TRUST

a. The Trust shall provide to the Agent the necessary and appropriate
documents, information, instructions, accounts, and records maintained or to be
maintained by or for the Trust. The Agent shall be entitled to rely exclusively
on the completeness and correctness of the accounts and records provided to the
Agent by the Trust; provided, that such reliance is made in good faith, and the
Trust shall indemnify and hold the Agent harmless of and from any and all
expenses (including, without limitation, attorneys' and accountants' fees),
damages, claims, suits, liabilities, actions, demands, and losses whatsoever
arising out of or in connection with any error, omission, inaccuracy, or other
deficiency of such accounts and records or in connection with the failure of the
Trust to provide any portion of such accounts and records or to provide any
information to the Agent necessary or appropriate to perform the Agent's
functions hereunder.

b. Accounts, records, and other information shall belong to the Trust and
shall be considered confidential. Accounts, records, and other information will
not be disclosed to other than Federal and state regulators without permission
from the Trust.

2. MAINTENANCE OF ACCOUNTS AND RECORDS OF THE TRUST

a. The Agent shall examine and review the Trust's existing accounts,
records, pertinent documents, and systems in order to determine or recommend how
such accounts, records, documents, and systems shall be maintained.

b. Upon receipt of necessary and appropriate information, instructions,
accounts, records, and documents from the Trust, the Agent shall maintain and
keep current and accurate the following books, accounts, records, journals, or
other records of original entry, relating to the business of the Trust and each
of the Funds and necessary or appropriate for compliance with applicable
regulations, including Rule 31a-a and Rule 31a-2 of the 1940 Act, and as may be
mutually agreed to between the Trust and the Agent:

(1) Cash Receipts
(2) Cash Disbursements
(3) Dividend Record
(4) Purchase and sales of Portfolio Securities
(5) Subscription and Redemption Journals
(6) Security Ledger
(7) Broker Ledger
(8) General Ledger
(9) Daily Expense Accruals
(10) Daily Interest Accruals
(11) Securities and Monies borrowed or loaned and collateral
therefor
(12) Trial Balances.

-3-
<PAGE>

c. Unless appropriate information necessary to perform the above
functions is furnished to the Agent in a timely manner, the Agent shall incur no
liability to the Trust or any other person. The Agent shall promptly notify the
Trust in writing of any discrepancy, error or non-compliance in items (1)
through (12) in Section 2 b., above, of which the Agent has knowledge.

d. It shall be the responsibility of the Trust promptly to furnish the
Agent with the declaration, record and payment dates and amounts of any
dividends or income and any other special actions taken concerning the portfolio
securities of each of the Funds.

e. The Agent shall maintain all accounts and records mentioned above as
required by regulation and as agreed upon between the Trust and the Agent.

3. ACCOUNTING ENTRIES AND CONFIRMATIONS

Upon receipt by the Agent of written or oral instructions from the Trust,
the Agent shall make proper accounting entries in accordance with Generally
Accepted Accounting Principles and regulations of the Commission. The Trust
shall direct that each broker-dealer, or other person through whom a transaction
has occurred, shall send a confirmation thereof to the Agent. The Agent shall
verify this confirmation against the written or oral instructions when received
from the Trust and forward the confirmation to the Trust's custodian (the
"Custodian"). The Agent shall promptly notify the Trust of any discrepancy
between the confirmation and the Trust's written instructions when received from
the Trust but shall incur no responsibility or liability for such discrepancy.
The Trust shall cause any necessary corrections to be made and shall advise the
Agent and the Custodian accordingly.

4. CALCULATION OF NET ASSET VALUE

a. The Agent shall calculate the Trust's net assets value for each of the
Funds in accordance with the Trust's currently-effective prospectuses, once
daily.

b. The Agent shall prepare and maintain a daily evaluation of securities
for which market quotations are available by the Agent's use of Bloomberg and
ILX quotation services; all other securities shall be evaluated in accordance
with the Trust's written instructions, and the Agent shall be no responsibility
or liability for the accuracy of the information supplied by the Trust or
provided in the written instructions.

c. The Trust assumes all responsibility for computation of "amortized
cost," valuation of securities, and all valuations not ascertainable solely by
mechanical procedures.

5. STATEMENTS FROM CUSTODIAN

At the end of each month, the Agent shall obtain from the Custodian a
monthly statement of cash and portfolio transactions, which shall be reconciled
with the Agent's accounts and records

-4-
<PAGE>

maintained for the Trust. The Agent shall report any discrepancies to the
Custodian, and shall report any unreconciled items to the Trust.

6. DAILY AND PERIODIC REPORTS

The Agent shall supply daily and periodic reports to the Trust, as required
by law or regulation, and as requested by the Trust and agreed upon the Agent.

7. REPORTS AND CONFIRMATIONS TO THE TRUST'S TRANSFER AGENT

a. The Trust shall report and confirm to the Trust's transfer agent (the
"Transfer Agent") the purchases and redemptions for each of the Funds of which
the Trust is aware. The Agent shall obtain from the Transfer Agent daily
reports of Share purchases, redemptions, and total Shares outstanding for each
of the Funds.

b. The Agent shall reconcile outstanding Shares for each of the Funds
with the Transfer Agent periodically and certify at least monthly to the Trust
the reconciled Share balance outstanding for each of the Funds.

8. REVIEW OF ACCOUNTS AND RECORDS OF THE TRUST

The accounts and records of the Trust maintained by the Agent shall be the
property of the Trust, and shall be made available to the Trust, within a
reasonable period of time, upon demand. The Agent shall assist the Trust's
independent auditors, and, upon approval of the Trust, or upon demand by any
governmental or quasi-governmental entity, assist any such entity in any
requested review of the Trust's accounts and records, but shall be reimbursed
for all expenses and employee time invested in any such review outside of
routine and normal periodic reviews. Upon receipt from the Trust of the
necessary information, the Agent shall supply the necessary data for the Trust's
completion of any necessary tax returns, questionnaires, periodic reports to
shareholders, and such other reports and information requests as the Trust and
the Agent shall agree upon from time to time.

9. UNIFORM PROCEDURES

The Agent and the Trust, from time to time, may adopt uniform or standard
procedures, and the Agent may conclusively assume that any procedure approved by
the Trust, or directed by the trust, does not conflict with or violate any
requirements of the Trust's prospectuses, the Trust By-Laws, or other governing
documents of the Trust, or any rule or regulation of any regulatory body or
governmental agency. The Trust shall be responsible to notify the Agent of any
changes in the Trust's By-Laws or in regulations or rules which might
necessitate changes in the Agent's procedures.

-5-
<PAGE>

10. RELIANCE

The Agent may rely upon the advice of the Trust and upon statements of the
Trust's accountants and other persons believed by the Agent in good faith to be
expert in matters upon which such persons are consulted, and the Agent shall not
be liable for any actions taken in good faith upon such statements.

11. INDEMNIFICATION AND LIABILITY

a. The Agent shall not be liable for any action taken in good faith
reliance upon any authorized oral instructions, any written instructions, any
certified copy of any resolution of the Trustees of the Trust, or any other
document reasonably believed by the Agent to be genuine and to have been
executed or signed by the proper person or persons. The Trust will send written
instructions to confirm oral instructions, and the Agent will compare the
written instructions against the oral instructions previously furnished. The
Agent will inform the Trust promptly of any noted discrepancy.

b. The Agent shall not be held to have notice of any change or lack of
authority of any officer, employee, or Agent of the Trust until receipt of
written notification thereof by the Trust.

c. The Trust shall indemnify the Agent and hold the Agent harmless from
and against all actions, suits, and claims whether groundless or otherwise,
arising directly or indirectly out of or in connection with the Agent's
performance under this Agreement and from and against any and all losses,
damages, costs, charges, attorneys' and accountants' fees, payments, expenses,
and liabilities incurred by the Agent in connection with any such action, suit,
or claim unless caused by the Agent's breach of this Agreement, negligence, or
willful misconduct. The Trust shall not be liable under this indemnification
provision with respect to any claim made against the Agent unless the Agent
shall have notified the Trust in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon the Agent (or after the Agent shall have
received notice of such service on any designated Agent), but failure to notify
the Trust of any such claim shall not relieve the Trust from any liability which
the Trust may have to the Agent against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against the Agent, the Trust shall be entitled to participate, at its
own expense, in the defense of such action. The Trust also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Trust to such party of the Trust's election to
assume the defense thereof, the Agent shall bear the fees and expenses of any
additional counsel retained by the Agent, and the Agent will not be liable to
such party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation. The Agent will promptly notify
the Trust of the commencement of any litigation or proceedings against the Agent
in connection with the Shares or the operations of the Funds.

-6-
<PAGE>

d. The Agent shall indemnify the Trust and hold the Trust harmless from
all actions, suits, damages, claims, demands, losses, and liabilities (including
reasonable attorneys' and accountants' fees and expenses) incurred or assessed
against the Trust arising directly or indirectly from the Agent's negligence,
wilful misconduct, or breach of this Agreement. The Agent shall not be liable
under this indemnification provision with respect to any claim made against the
Trust unless the Trust shall have notified the Agent in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the Trust (or
after the Trust shall have received notice of such service on any designated
Agent), but failure to notify the Agent of any such claim shall not relieve the
Agent from any liability which it may have to the Trust against whom such action
is brought otherwise than on account of this indemnification provision. In case
any such action is brought against the Trust, the Agent shall be entitled to
participate, at its own expense, in the defense of such action. The Agent also
shall be entitled to assume the defense hereof, with counsel satisfactory to the
party named in the action. After notice from the Agent to such party of the
Agent's election to assume the defense thereof, the Trust shall bear the fees
and expenses of any additional counsel retained by the Trust, and the Agent will
not be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation. The Trust will promptly
notify the Agent of the commencement of any litigation or proceedings against
the Trust in connection with the Shares or the operations of the Funds.

e. The shareholders, Trustees, officers, employees, and agents of the
Trust shall not be personally bound by or liable hereunder, nor shall resort be
had to such person's private property for the satisfaction of any obligation or
claim hereunder as provided for in the Trust's By-Laws.

12. COMPENSATION

The Trust agrees to pay the Agent compensation for its services and to
reimburse the Agent for expenses, as set forth in Schedule A attached hereto, or
as shall be set forth in amendments to such Schedule approved by the Trust and
the Agent.

13. DAYS OF BUSINESS

Nothing contained in this Agreement is intended to or shall require the
Agent, in any capacity hereunder, to perform any functions or duties on any
holiday or other day of special observance on which the New York Stock Exchange
is closed. Functions or duties normally scheduled to be performed on such days
shall be performed on, and as of, the next business day on which the New York
Stock Exchange is open for business.

-7-
<PAGE>

14. TERM OF AGREEMENT

15. TERMINATION

This Agreement may be terminated, without the payment of any penalty, by
either party hereto upon at least ninety (90) days written notice to the other
party. Any termination by the Trust will be pursuant to a vote of a majority of
the Trustees.

16. NOTICES

a. Communications to the Agent shall be addressed to:

PADCO Service Company, Inc.
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
Attention: President

b. Communications to the Trust shall be addressed to:

Rydex Variable Trust
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
Attention: President

c. In the event of a change of address, communications will be addressed
to such new address as designated in a written notice from the Trust or the
Agent, as the case may be. All communications addressed in the above manner and
by registered mail or delivered by hand will be sufficient under this Agreement.

17. GOVERNING LAW

This Agreement is governed by the laws of the State of Maryland (without
reference to such state's conflict of law rules).

-8-
<PAGE>

18. COUNTERPARTS

This Agreement may be executed in counterparts, each of which shall be
deemed an original, but which together shall constitute one and the same
instrument.

19. BINDING EFFECT AND ASSIGNMENT

This Agreement shall be binding upon the parties hereto and their
respective successors and assigns; provided, however, that this Agreement shall
not be assignable by the Trust without the written consent of the Agent, or by
the Agent without the written consent of the Trust, in each case authorized or
approved by a resolution of the Trustees of the Trust.

20. AMENDMENT, MODIFICATION, AND WAIVER

No term or provision of this Agreement may be amended, modified, or waived
without the affirmative vote or action by written consent of the Agent and the
Trust.

-9-
<PAGE>

IN WITNESS WHEREOF, the Agent and the Trust have executed this Agreement as
of the date first written above.

RYDEX VARIABLE TRUST

By:
------------------------------------------
Albert P. Viragh, Jr.
President

PADCO SERVICE COMPANY, INC.

By:
------------------------------------------
Albert P. Viragh, Jr.
President

-10-
<PAGE>

SCHEDULE A

PADCO SERVICE COMPANY, INC.

FEE SCHEDULE FOR ACCOUNTING SERVICES

RYDEX VARIABLE TRUST - EACH SEPARATE FUND

A. ANNUAL FEE - (Based upon average net assets - payable monthly) shall be the
greater of:

FIXED FEE
$20,000

BASIS POINT FEE
10 Basis Points on first $30 million of assets
5 Basis Points on next $20 million of assets
3 Basis Points on next $50 million of assets
2 Basis Points on assets over $100 million

B. In addition, all out-of-pocket expenses shall be separately charged, shall
include but not be limited to: printed forms, postage, overnight mail and
telephone expense.

C. PADCO Service Company, Inc. Warrants that the above rates of compensation
are guaranteed for a two-year period. At that time, the Trust acknowledges
that the Agent has the right to revise the Agent's compensation schedule.

-11-

<PAGE>

October 7, 1998

Rydex Variable Trust
6116 Executive Boulevard, Suite 400
Rockville, MD 20852

Ladies and Gentlemen:

We are furnishing this opinion with respect to the proposed offer and sale from
time to time of an indefinite number of units of beneficial interest, without
par value (the "Shares"), of Rydex Variable Trust (the "Trust"), a Delaware
business trust, in registration under the Securities Act of 1933 by a
Registration Statement on Form N-1A (File No. 333-57017; 811-08821) as amended
from time to time (the "Registration Statement").

We have acted as counsel to the Trust since its inception, and we are familiar
with the actions taken by its Trustees to authorize the issuance of the Shares.
We have reviewed the Declaration of Trust, the By-laws, and the minute books of
the Trust, and such other certificates, documents and opinions of counsel as we
deem necessary for the purpose of this opinion.

We have reviewed the Trust's Notification of Registration on Form N-8A under the
Investment Company Act of 1940. We have assisted in the preparation of the
Trust's Registration Statement, including all pre-effective amendments thereto,
filed or to be filed with the Securities and Exchange Commission.

In our review we have assumed the genuineness of all signatures, the
authenticity and completeness of all documents purporting to be originals
(whether reviewed by us in original or in copy form), and the conformity to the
originals of all documents purporting to be copies.

We have assumed the appropriate action will be taken to register or qualify the
sale of the Shares under any applicable state and federal laws regulating sales
and offerings of securities.

<PAGE>

Rydex Variable Trust
Page 2

Based upon the foregoing, we are of the opinion that:

1. The Trust is a business trust validly existing under the laws of the State
of Delaware. The Trust is authorized under its Declaration of Trust to
issue an unlimited number of Shares in series representing interests in the
Nova Fund, Ursa Fund, OTC Fund, Arktos Fund, Precious Metals Fund, U.S.
Government Bond Fund, Juno Fund, U.S. Government Money Market Fund, Banking
Fund, Basic Materials Fund, Biotechnology Fund, Consumer Products Fund,
Electronics Fund, Energy Fund, Energy Services Fund, Financial Services
Fund, Health Care Fund, Leisure Fund, Retailing Fund, Technology Fund,
Telecommunications Fund, and Transportation Fund, and in such other series
or classes as the Trustees may hereafter duly authorize.

2. Upon the issuance of any Shares of any of the series or classes of the
Trust for payment therefor as described in, and in accordance with, the
Registration Statement and the Declaration of Trust and By-laws of the
Trust, the Shares so issued will be validly issued, fully paid and
non-assessable, except that, as set forth in the Registration Statement,
shareholders of the Shares of the Trust may under certain circumstances be
held personally liable for its obligations.

This opinion is intended only for your use in connection with the offering
of Shares and may not be relied upon by any other person.

We hereby consent to the inclusion of this opinion as Exhibit (i) to the
Trust's Pre-Effective Amendment No. 1 to be filed with the Securities and
Exchange Commission and to the reference to our firm under the caption
"Legal Counsel" in the Statement of Additional Information filed as part of
such Amendment.

Very truly yours,

Morgan, Lewis & Bockius LLP

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANTS
--------------

We consent to the inclusion in the Pre-Effective Amendment No. 1 (File
No. 333-57017) under the Securities Act of 1933 and Pre-Effective Amendment
No. 1 (File No. 811-08821) under the Securities Act of 1940 to the
Registration Statement on Form N-1A of Rydex Variable Trust (the "Trust") of
our report dated March 6, 1998 on our audit of the financial statements and
financial highlights of the Rydex Advisor Variable Annuity Account,
(predecessor of the Trust), consisting of the Nova subaccount, Ursa
subaccount, Money Market subaccount, OTC subaccount, Precious Metals
subaccount, U.S. Government Bond subaccount, and Juno subaccount, which
report is included in the Annual Report to contract owners for the period
ended December 31, 1997 which is included in the Registration Statement.

We also consent to the reference to our firm under the captions
"Financial Highlights" in the Prospectus and "Financial Statements" in the
Statement of Additional Information.

PricewaterhouseCoopers LLP

Baltimore, Maryland
October 14, 1998

<PAGE>

RYDEX SERIES TRUST
RYDEX VARIABLE TRUST

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee of Rydex
Series Trust and Rydex Variable Trust, each a business trust ("Trust") organized
under the laws of the State of Delaware, hereby constitutes and appoints Albert
P. Viragh, Jr. and Carl G. Verboncoeur, and each of them singly, his true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, to sign for him and in his name, place and stead, and in the
capacity indicated below, to sign any and all Registration Statements and all
amendments thereto relating to the offering of the Trust's shares under the
provisions of the Investment Company Act of 1940 and/or the Securities Act of
1933, each such Act as amended, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
acting alone, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as
of the date set forth below.

/s/ Corey A. Colehour
- ----------------------------------- Date: October 13, 1998
Corey A. Colehour
Trustee

<PAGE>

RYDEX SERIES TRUST
RYDEX VARIABLE TRUST

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as
of the date set forth below.

/s/ J. Kenneth Dalton
- ----------------------------------- Date: October 13, 1998
J. Kenneth Dalton
Trustee
<PAGE>

RYDEX SERIES TRUST
RYDEX VARIABLE TRUST

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as
of the date set forth below.

/s/ Roger Somers
- ----------------------------------- Date: October 13, 1998
Roger Somers
Trustee
<PAGE>

RYDEX SERIES TRUST
RYDEX VARIABLE TRUST

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as
of the date set forth below.

/s/ John O. Demaret
- ----------------------------------- Date: October 13, 1998
John O. Demaret
Trustee

<PAGE>

RYDEX SERIES TRUST
RYDEX VARIABLE TRUST

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as
of the date set forth below.

/s/ Patrick T. McCarville
- ----------------------------------- Date: October 13, 1998
Patrick T. McCarville
Trustee

<PAGE>

RYDEX VARIABLE TRUST

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee of Rydex
Variable Trust (the "Trust"), a business trust organized under the laws of the
State of Delaware, hereby constitutes and appoints Albert P. Viragh, Jr. and
Carl G. Verboncoeur, and each of them singly, his true and lawful attorneys-in-
fact and agents with full power of substitution and resubstitution, to sign for
him and in his name, place and stead, and in the capacity indicated below, to
sign any and all Registration Statements and all amendments thereto relating to
the offering of the Trust's shares under the provisions of the Investment
Company Act of 1940 and/or the Securities Act of 1933, each such Act as amended,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, acting alone, full power
and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as
of the date set forth below.

/s/ L. Gregory Gloeckner
- ----------------------------------- Date: October 13, 1998
L. Gregory Gloeckner
Trustee

<PAGE>

RYDEX SERIES TRUST
RYDEX VARIABLE TRUST

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee of Rydex
Series Trust and Rydex Variable Trust, each a business trust ("Trust") organized
under the laws of the State of Delaware, hereby constitutes and appoints Albert
P. Viragh, Jr., his true and lawful attorney-in-fact and agent with full power
of substitution and resubstitution, to sign for him and in his name, place and
stead, and in the capacity indicated below, to sign any and all Registration
Statements and all amendments thereto relating to the offering of the Trust's
shares under the provisions of the Investment Company Act of 1940 and/or the
Securities Act of 1933, each such Act as amended, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute, may
lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as
of the date set forth below.

/s/ Carl G. Verboncoeur
- ----------------------------------- Date: October 13, 1998
Carl G. Verboncoeur
Vice President and Treasurer
<PAGE>

RYDEX SERIES TRUST
RYDEX VARIABLE TRUST

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned trustee of Rydex
Series Trust and Rydex Variable Trust, each a business trust ("Trust") organized
under the laws of the State of Delaware, hereby constitutes and appoints Carl G.
Verboncoeur, his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, to sign for him and in his name, place and
stead, and in the capacity indicated below, to sign any and all Registration
Statements and all amendments thereto relating to the offering of the Trust's
shares under the provisions of the Investment Company Act of 1940 and/or the
Securities Act of 1933, each such Act as amended, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute, may
lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as
of the date set forth below.

/s/ Albert P. Viragh, Jr.
- ----------------------------------- Date: October 13, 1998
Albert P. Viragh, Jr.
President