VICTORY VARIABLE FUNDS, N-1A, 1998-08-21

VICTORY VARIABLE FUNDS
N-1A, 1998-08-21

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As filed via EDGAR with the Securities and Exchange
Commission on August __, 1998

File No. 333-_____
ICA No. 811-8979

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]

PRE-EFFECTIVE AMENDMENT NO. __ [ ]

POST-EFFECTIVE AMENDMENT NO. __ [ ]
AND
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]

AMENDMENT NO. __

THE VICTORY VARIABLE FUNDS
--------------------------
(Exact Name of Registrant as Specified in Charter)

345 Stelzer Road, Columbus OH 43219
-----------------------------------
(Address of Principal Executive Office) (Zip Code)

Registrant's Telephone Number, including Area Code: (800) 362-5365

Michael J. Sullivan
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219
------------------
(Name and Address of Agent for Service)

Copy to:

Carl Frischling, Esq.
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022

Approximate date of proposed public offering: As soon as practicable
after this registration statement becomes effective.
---------------------------------------------------

Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until 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>

CROSS-REFERENCE SHEET

(Pursuant to Rule 404 showing location in the Prospectus of the
responses to the Items in Part A and location in the Statement of Additional
Information of the responses to the Items in Part B of Form N-1A).

THE VICTORY VARIABLE FUNDS

Item Number
Form N-1A,
Part A Prospectus Caption
------ ------------------

1(a) Front Cover Page

(b) Back Cover Page

2(a) Risk/Return Summary - Investment Objective

(b) Risk/Return Summary - Principal Strategies

3 Not Applicable

4(a) Risk/Return Summary - Investment Objective

(b) Risk/Return Summary - Principal Strategies, Investments

5 Performance

6(a) Organization and Management of the Funds

(b) Not Applicable

7(a) Share Price

(b) Investing in the Variable Insurance Funds - How to Purchase
Shares

(d) Dividends, Distributions, and Taxes

(e) Dividends, Distributions, and Taxes - Important Information
about Taxes

(f) Not Applicable

8(a) Not Applicable

(b) Distribution Plan (Class B Prospectus only)

9 Not Applicable

-1-

<PAGE>

Item Number
Form N-1A, Statement of Additional
Part B Information Caption
------ -------------------

10(a) Front Cover Page

(b) Table of Contents

11(a) Additional Information - Description of Shares

(b) Not Applicable

12(a) Statement of Additional Information

(b) Additional Information

(d) Temporary Defensive Measures - Short-Term Obligations

(e) Not Applicable

13(a) Trustees and Officers - Board of Trustees

(b) Trustees and Officers - Board of Trustees; Officers

(d) Trustees and Officers - Board of Trustees

(e) Trustees and Officers - Officers

14(a) Miscellaneous

(b) Not Applicable

15(a) Advisory and Other Contracts - Investment Adviser

(b) Advisory and Other Contracts - Distributor

(d) Transfer Agent; Class B Shares Distribution Plan,Fund Accountant;
Legal Counsel

(e) Not Applicable

(f) Additional Purchase, Exchange, and Redemption Information

(g) Class B Shares Distribution Plan

(h) Administrator; Transfer Agent; Custodian; Independent Accountant;

-2-

<PAGE>

Item Number
Form N-1A, Statement of Additional
Part B Information Caption
------ -------------------

Legal Counsel

16(a) Portfolio Transactions

(b) Not Applicable

(d) Not Applicable

(e) Not Applicable

17(a) Additional Information - Description of Shares

(b) Not Applicable

18(a) Additional Purchase, Exchange, and Redemption Information;
Purchasing Shares

(b) Not Applicable

(d) Additional Purchase, Exchange, and Redemption Information

19(a) Taxes

(b) Taxes

20(a) Distributor

(b) Not Applicable

21(a) Not Applicable

(b) Performance of the Funds

22(a) Not Applicable

(b) Not Applicable

-3-

<PAGE>

Part C

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.

-4-

<PAGE>

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.

LOGO (R)
Victory Funds

PROSPECTUS

THE VICTORY VARIABLE INSURANCE FUNDS

INVESTMENT QUALITY BOND FUND

DIVERSIFIED STOCK FUND

SMALL COMPANY VALUE FUND

Class A Shares

The Victory Variable Insurance Funds are designed as an investment
exclusively for variable annuity or variable life insurance contracts
that are offered by the separate
accounts of participating insurance companies. The participating
insurance companies will redeem shares as needed to provide
benefits under the contracts.

The Victory Variable Insurance Funds offer Class A Shares and Class B
Shares. This Prospectus pertains to Class A Shares only. Participating insurance
companies may request information regarding Class B Shares by calling
1-800-539-FUND.

The Securities and Exchange Commission has not approved any
Fund's Shares as an investment or determined whether this Prospectus
is accurate or complete. Anyone who tells you otherwise is committing
a crime.

November ___, 1998

<PAGE>

TABLE OF CONTENTS

RISK/RETURN SUMMARY

Investment Quality Bond Fund

Diversified Stock Fund

Small Company Value Fund

RISK FACTORS

SHARE PRICE

PERFORMANCE

DIVIDENDS, DISTRIBUTIONS, AND TAXES

INVESTING IN THE VARIABLE INSURANCE FUNDS

How to Purchase Shares

How to Exchange Shares

How to Redeem Shares

ORGANIZATION AND MANAGEMENT OF THE FUNDS

OTHER SECURITIES AND INVESTMENT PRACTICES

ADDITIONAL INFORMATION

<PAGE>

RISK/RETURN SUMMARY

INVESTMENT QUALITY BOND FUND

Investment Objective

The Investment Quality Bond Fund seeks to provide a high level of income.

Principal Strategies

The Investment Quality Bond Fund pursues its investment objective by investing
primarily in investment-grade bonds issued by corporations and the U.S.
Government and its agencies or instrumentalities.

Principal Risks

The Investment Quality Bond Fund is subject to the risks common to all mutual
funds that invest in debt securities and foreign securities. These and other
risks are described in "Risk Factors." You could lose money if any of the
following occurs:

o Interest rates rise

o An issuer's credit quality is downgraded

o The Fund must reinvest interest or sale proceeds at lower rates

o The rate of inflation increases

o Political or economic events overseas adversely affect the value of foreign
securities

o The average life of a mortgage-related security is shortened or lengthened

Investments

"Investment grade" obligations in which the Investment Quality Bond Fund may
invest are those rated within the top four rating categories by a nationally
recognized statistical rating organization (NRSRO), such as Standard & Poor's
(S&P), Fitch, or Moody's. NRSROs assign credit ratings to securities based on
the issuer's ability to make principal and interest payments.

Under normal conditions, the Investment Quality Bond Fund will invest at least
80% of its total assets in the following securities:

o Investment grade corporate securities, including asset-backed securities
and convertible and exchangeable debt securities

o Mortgage-related securities issued by non-governmental entities

o Obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities

o Government mortgage-backed securities

Important Characteristics of the Investment Quality Bond Fund's Investments:

o Quality: All instruments will be rated, at the time of purchase, within the
four highest rating categories by S&P, Fitch, Moody's, or another NRSRO,
or, if unrated, be of comparable quality. For more information on ratings,
see the Appendix to the Statement of Additional Information (SAI).

o Maturity: The dollar-weighted effective average maturity of the Investment
Quality Bond Fund will range from 5 to 15 years. Individual assets held by
the Fund may vary from the average maturity of the Fund. Under certain
market conditions, the Fund's portfolio manager may go outside these
boundaries.

Up to 20% of the Investment Quality Bond Fund's total assets may be invested in
preferred and convertible preferred stocks, and separately traded interest and
principal component parts of U.S. Treasury obligations. Up to 35% of the Fund's
total assets may be invested in high quality, short-term debt.

The Investment Quality Bond Fund may also invest in international bonds, foreign
securities, and futures contracts and options related to these securities.

<PAGE>

DIVERSIFIED STOCK FUND

Investment Objective

The Diversified Stock Fund seeks to provide long-term growth of capital.

Principal Strategies

The Diversified Stock Fund pursues its investment objective by investing
primarily in equity securities and securities convertible into common stocks
issued by established domestic and foreign companies.

Principal Risks

The Diversified Stock Fund is subject to the risks common to all mutual funds
that invest in equity securities and foreign securities. These and other risks
are described in "Risk Factors." You could lose money if any of the following
occurs:

o The stock market goes down

o "Value" stocks fall out of favor with investors

o A company's earnings do not increase as expected

o Political or economic events overseas adversely affect the value of foreign
securities

Investments

Key Asset Management Inc. (KAM or the Adviser) seeks to invest in securities
that it considers undervalued in relation to historical earnings and the value
of the issuer's underlying assets. In making investment decisions, the Adviser
may consider cash flow, book value, dividend yield, growth potential, quality of
management, adequacy of revenues, earnings, capitalization, and expected future
relative earnings growth. The Adviser will pursue investments that provide above
average dividend yield or potential for appreciation.

Under normal market conditions, the Diversified Stock Fund:

o Will invest at least 80% of its total assets in equity securities and
securities convertible or exchangeable into common stock

o May invest up to 20% of its total assets in:
Preferred stocks
Investment-grade corporate debt securities
Short-term debt obligations
U.S. Government obligations

<PAGE>

SMALL COMPANY VALUE FUND

Investment Objective

The Small Company Value Fund seeks to provide long-term growth of capital and
dividend income.

Principal Strategies

The Small Company Value Fund pursues its investment objective by investing
primarily in equity securities of small-sized companies. The weighted average
market capitalization of the Small Company Value Fund will be similar to that of
its benchmark, the Standard & Poor's 600 SmallCap Index. (As of June 30, 1998
the Small Company Value Fund had a weighted average market capitalization of
$1.2 billion.)

Distribution and Service Plan according to Rule 126-1 the Investment Company Act
of 1940, the Funds have adopted a Destribution and Service Plan. The Funds do
not currently pay expenses for Class A Shares under this Plan.

Principal Risks

The Small Company Value Fund is subject to the risks common to all mutual funds
that invest in equity securities. These and other risks are described in "Risk
Factors." You could lose money if any of the following occurs:

o The stock market goes down

o "Value" and/or small-sized company stocks fall out of favor with investors

o A company's earnings do not increase as expected

Investments

The Adviser looks for companies with above average total return potential whose
equity securities are undervalued and are inexpensive relative to historical
measurements, such as price to earnings.

Under normal market conditions the Small Company Value Fund will:

o Invest at least 80% of its total assets in:
Equity securities
Securities convertible or exchangeable into common stock of
small-sized companies

o Invest up to 20% of its total assets in:
Investment-grade corporate debt securities
Preferred stocks
Short-term debt obligations
U.S. Government obligations

<PAGE>

Who may want to invest in the Funds?

o investors who want a diversified portfolio

o long-term investors with a particular goal, like saving for retirement

o investors who want potential growth over time

o investors who can tolerate fluctuation in net asset value (NAV) per share

Who may want to invest in the:

o Investment Quality Bond Fund? Investors seeking a high level of income and
who want a portfolio of investment grade debt securities.

o Diversified Stock Fund? Investors who are willing to take more risk in the
short-term for potentially higher gains in the long-term.

o Small Company Value Fund? Investors who are comfortable with assuming the
added risks associated with small company stocks in return for the
possibility of long-term rewards.

The Funds may not be appropriate for investors who:

-- are not willing to take any risk that they may lose money on their
investment

-- want absolute stability of their investment principal

-- want to invest in a particular sector or in particular industries,
countries, or regions

Keep in mind that mutual fund shares:

-- are not deposits of any bank

-- are not insured by the Federal Deposit Insurance Corporation or any
other government agency

-- are subject to investment risks, including possible loss of the
principal amount invested

RISK FACTORS

****It is important to keep in mind one basic principle of investing: the
greater the risk, the greater the potential reward. The reverse is also
generally true: the lower the risk, the lower the potential reward.****

This prospectus describes some of the risks that you may assume as an investor
in the Funds. By matching your investment objective with a comfortable level of
risk, you can create your own customized investment plan. "Other Securities and
Investment Practices" in this prospectus provides additional information on the
securities mentioned in the overview of each of the Funds. As with any mutual
fund, there is no guarantee that a Fund will earn income or show a positive
total return over time. A Fund's price, yield, and total return will fluctuate.
You may lose money if a Fund's investments do not perform well.

The following risks are common to all mutual funds:

o Market risk is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a result
of this fluctuation, a security may be worth more or less than the price a
Fund originally paid for it or less than the security was worth at an
earlier time. Market risk may affect a single security, an industry, a
sector of the economy, or the entire market and is common to all
investments.

o Manager risk is the risk that a Fund's portfolio manager may use a strategy
that does not produce the intended result. Manager risk also refers to the
possibility that the portfolio manager may fail to execute a Fund's
investment strategy effectively and, thus, fail to achieve the Fund's
investment objective.

o Year 2000 Risk. Like other mutual funds, each of the Funds could be
adversely affected if the computer systems used by their service providers,
including shareholder servicing agents and participating insurance
companies, do not properly process and calculate date-related information.
The Funds' service providers have been actively updating their systems to
be able to process year 2000 data. However, there can be no

<PAGE>

assurance that these steps will be adequate to avoid a temporary service
disruption or any adverse impact on the Funds.

The following risks are common to mutual funds that invest in debt securities:

o Interest rate risk. The value of a debt security typically changes in the
opposite direction from a change in interest rates. When interest rates go
up, the value of a fixed-rate security typically goes down. When interest
rates go down, the value of these securities typically goes up. Generally,
the market values of securities with longer maturities are more sensitive
to changes in interest rates.

o Inflation risk is the risk that inflation will erode the purchasing power
of the cash flows generated by debt securities held by a Fund. Fixed-rate
debt securities are more susceptible to this risk than floating-rate debt
securities.

o Reinvestment risk is the risk that when interest income is reinvested,
interest rates will have declined so that income must be reinvested at a
lower interest rate. Generally, interest rate risk and reinvestment risk
have offsetting effects.

o Credit (or default) risk is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal. Although
the Funds generally invest only in high-quality securities, the interest or
principal payments may not be insured or guaranteed on all securities.
Credit risk is measured by NRSROs such as S&P, Fitch, or Moody's.

The following risks are common to mutual funds that invest in mortgage-related
securities:

o Prepayment risk. Prepayments of principal on mortgage-related securities
affect the average life of a pool of mortgage-related securities. Mortgage
prepayments are affected by the level of interest rates and other factors.
In periods of rising interest rates, the prepayment rate tends to decrease,
lengthening the average life of a pool of mortgage-related securities. In
periods of falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool of mortgage-related securities.
Prepayment risk is the risk that, because prepayments generally occur when
interest rates are falling, a Fund may have to reinvest the proceeds from
prepayments at lower interest rates.

o Extension risk is the risk that anticipated payments on principal may not
occur, typically because of a rise in interest rates, and the expected
maturity of the security will increase. During periods of rapidly rising
interest rates, the anticipated maturity of a security may be extended past
what the Adviser anticipated that it would be, affecting the maturity and
volatility of a Fund.

The following risk is common to mutual funds that invest in equity securities:

o Equity risk is the risk that the value of the security will fluctuate in
response to changes in earnings or other conditions affecting the issuer's
profitability. Unlike debt securities, which have preference to a company's
earnings and cash flow, equity securities are entitled to the residual
value after the company meets its other obligations. For example, in the
event of bankruptcy, holders of debt securities have priority over holders
of equity securities to a company's assets.

The following risks are common to mutual funds that invest in foreign
securities:

o Foreign issuer and currency risk. Compared to U.S. and Canadian companies,
there generally is less publicly available information about foreign
companies and there may be less governmental regulation and supervision of
foreign stock exchanges, brokers, and listed companies. Foreign issuers may
not be subject to the uniform accounting, auditing, and financial reporting
standards and practices used by domestic issuers.

<PAGE>

In addition, foreign securities markets may be less liquid, more volatile,
and less subject to governmental supervision than in the U.S. Investments
in foreign countries could be affected by factors not present in the U.S.,
including expropriation, confiscation of property, and difficulties in
enforcing contracts. Currency risk is the risk that fluctuations in the
exchange rates between the U.S. dollar and foreign currencies may
negatively affect an investment. Adverse changes in exchange rates may
erode or reverse any gains produced by foreign currency denominated
investments and may widen any losses.

The following risk is common to mutual funds that invest in futures and options
contracts:

o Correlation risk. Futures and options contracts can be used in an effort to
hedge against certain risks. Generally, an effective hedge generates an
offset to gains or losses of other investments made by a Fund. Correlation
risk is the risk that a hedge created using futures or options contracts
(or any derivative, for that matter) does not, in fact, respond to economic
conditions in the manner the portfolio manager expected. In such a case,
the futures or options contract hedge may not generate gains sufficient to
offset losses and may actually generate losses.

SHARE PRICE

Each Fund's share price, called its "net asset value" (NAV), is calculated each
business day at the close of the New York Stock Exchange, Inc. (normally at 4:00
p.m. Eastern Time). Shares are purchased, exchanged, and redeemed at the next
share price calculated after your investment instructions are received and
accepted by an authorized representative of a Participating Company. A business
day is a day on which the New York Stock Exchange, Inc. is open for trading or
any day in which enough trading has occurred in the securities held by a Fund to
materially affect the NAV.

The NAV is calculated by adding up the total value of a Fund's investments in
the mutual funds and other assets, subtracting the Fund's liabilities, and then
dividing that figure by the number of outstanding shares of the Fund. The value
of an investment in a mutual fund is based upon the NAV determined by that
mutual fund.

NAV = Total Assets - Liabilities
--------------------------
Number of Shares Outstanding

Most mutual funds' net asset values can be found daily in the Wall Street
Journal and other newspapers. Newspapers do not normally publish Fund
information until it reaches a specific number of shareholders or level of
assets.

PERFORMANCE

Similarly, the Small Company Value Fund has essentially the same portfolio
management team, investment objective, policies and restrictions as the Key
Trust Small Capitalization Value Fund, a fund managed by KAM for Key Trust
fiduciary clients, and separate accounts advised by KAM over the time period
(the Small Company Composite).

Since each Fund will operate in substantially the same manner as its
corresponding comparison Composite, past performance may be considered relevant.
HOWEVER, PAST PERFORMANCE DOES NOT NECESSARILY INDICATE HOW A FUND WILL PERFORM
IN THE FUTURE.

The performance figures shown for each Composite reflect the deduction of
weighted average historical fees and expenses paid by the relevant mutual funds,
separate accounts, and/or common trust fund, and not the fees and expenses to be
paid by the corresponding Variable Insurance Fund. Performance information for
the mutual funds in the Bond and Diversified Stock Composites reflects fee
waivers and expense reimbursements. Accordingly, the returns for these
Composites would have been lower without such waivers and reimbursements.

<PAGE>

The performance information shown below does not reflect the deduction of any
insurance fees or charges that are imposed by an insurance company in connection
with its sale of variable annuity or variable life insurance contracts.
Investors should refer to the separate account prospectuses describing these
contracts for information pertaining to applicable insurance fees and charges.
Deducting insurance separate account fees will diminish a Fund's performance.

The average annual total return table also includes a comparison of the
performance of each Composite with an appropriate benchmark index.

If the performance had been adjusted for operating expenses, the total return
data would be lower.

<PAGE>

Average Annual Total Returns
For the Periods Ended December 31, 1997*
----------------------------------------

One Year Three Years Five Years Ten Years

Bond Composite _______% _______% _______% _______%
Lehman Aggregate Bond Index _______% _______% _______% _______%

Diversified Stock Composite _______% _______% _______% _______%

S&P 500 Stock Index _______% _______% _______% _______%

Small Company Composite _______% _______% _______% _______%
S&P 600 SmallCap Index _______% _______% _______% _______%

Total Returns
For the Years Ended December 31*
--------------------------------
<TABLE>

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----

Bond Composite ---- ---- ---- ---- ---- ---- ---- ---- ---- ----

Diversified Stock ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Composite

Small Company ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Composite

</TABLE>

<PAGE>

Best Quarter* Worst Quarter*
Bond Composite

Diversified Stock
Composite

Small Company Composite

* KAM has prepared this report in compliance with the Performance
Presentation Standards of the Association for Investment Management and
Research (AIMR-PPS(TM)).

****Past performance is not a guarantee of future results.****

DIVIDENDS, DISTRIBUTIONS, AND TAXES

Each Fund expects to distribute substantially all of its ordinary income and
capital gains each year. Ordinarily, each Fund declares and pays dividends from
its net investment income quarterly. Capital gains distributions, if any, from
the Funds will be made annually. In addition, a Fund may occasionally be
required to make supplemental dividend or capital gains distributions at some
other time during the year.

All dividend distributions made by each Fund will be automatically reinvested in
additional shares of the Fund.

Important Information about Taxes

Each Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the Code), so that it will not be
subject to federal income tax on its earnings and capital gains that are
distributed to its shareholders. In addition, each Fund intends to comply with
the diversification requirements of the Code and Treasury Regulations in order
to maintain the tax-deferred status of the variable life insurance and variable
annuity contracts (the Contracts).

Shares of a Fund must be purchased through the Contracts. As a result, it is
anticipated that any dividend or capital gains distribution from a Fund will be
exempt from current taxation if left to accumulate within a Contract. Each Fund
is managed without regard to tax ramifications. Withdrawals from a Contract may
be subject to ordinary income tax plus a 10% penalty tax if made before age 59
1/2.

The foregoing discussion of federal income tax consequences is based on tax laws
and regulations in effect as of the date of this Prospectus, and is subject to
change by legislative, administrative or judicial action. As the foregoing
discussion is for general information only, you also should review the more
detailed discussion of federal income tax considerations that is contained in
the SAI. In addition, you should consult with your own tax adviser as to the tax
consequences of investments in a Fund, including the application of state and
local taxes which may differ from the federal income tax consequences described
above.

The tax status of your investment in a Fund depends upon the features of your
contract. For further information, please refer to the Contract prospectus.

INVESTING IN THE VARIABLE INSURANCE FUNDS

How to Purchase Shares

You cannot purchase shares of the Funds directly, but only through contracts or
policies offered through the participating insurance companies. Please refer to
the separate account prospectus of the insurance company for information on how
to purchase and redeem shares.

<PAGE>

Insurance accounts invest in a Fund based upon the current net asset value of
such Fund. Victory processes orders to purchase or redeem shares of a Fund at
the Fund's net asset value per share. The value of your investment in a Fund
also will be based upon premium payments, surrender and transfer requests, and
any other transaction requests from contract and policy owners, annuitants, and
beneficiaries. In order to calculate the value of your investment, you would
have to determine the number of contract units you own along with the "accrued
unit value of your insurance contract." Any orders to purchase or redeem Fund
shares that are based on actions by participating insurance companies or persons
other than contract or policy owners, annuitants, and beneficiaries will be
executed at the Fund's net asset value per share next computed after the
Distributor receives the order. The Victory Variable Insurance Funds reserve the
right to suspend the sale of the Funds' shares in response to conditions in the
securities markets or for other reasons.

How to Exchange Shares

You may give your Investment Professional instructions to exchange shares of one
Fund for shares of another Fund. The exchange will be made at relative net asset
value.

How to Redeem Shares

If you wish to redeem your investment from a Fund, please refer to the Fund
instructions provided in the Account Prospectus for the insurance company's
separate account. You may redeem shares on any business day. The redemption
price of shares will be the Fund's net asset value per share next computed after
the Account receives your transaction request. Under certain emergency
circumstances the right of redemption may be suspended.

ORGANIZATION AND MANAGEMENT OF THE FUNDS

About Victory

Each Fund is a series of the Trust, a group of three distinct investment
portfolios, organized as a Delaware business trust.

The Board of Trustees of the Trust has the overall responsibility for the
management of the Funds. They are elected by the shareholders.

Fees and Expenses

The Funds incur annual operating expenses which include investment advisory,
administrative, and distribution expenses. You also should review the fee tables
in the separate account prospectus for your variable annuity or variable life
investment.

The Investment Adviser

One of the Trust's most important contracts is its Advisory Agreement with KAM,
a New York corporation registered as an investment adviser with the SEC. KAM is
a subsidiary of KeyBank National Association, a wholly-owned subsidiary of
KeyCorp. Affiliates of the Adviser manage approximately $64 billion for a
limited number of individual and institutional clients. KAM's address is 127
Public Square, Cleveland, Ohio 44114.

KAM will be paid a monthly advisory fee at an annual rate based on the average
daily net assets of each Fund as follows:

Investment Quality Bond Fund -- 0.20%
Diversified Stock Fund -- 0.30%

<PAGE>

Small Company Value Fund -- 0.30%

Shareholder Servicing Plan

The Victory Variable Insurance Funds have adopted a Shareholder Servicing Plan
for each class of the Funds' shares. A shareholder servicing agent performs a
number of services for its customers who are Fund shareholders, such as
establishing and maintaining accounts and records, processing dividend payments,
arranging for bank wires, assisting in transactions, and changing account
information. For these services, Class A Shares of each Fund pay a fee at an
annual rate of up to .20% of its average daily net assets serviced by the agent.
The Funds may enter into these agreements with KeyBank National Association and
its affiliates, and with other financial institutions. The Funds may pay a
servicing fee to broker-dealers and others who sponsor "no transaction fee" or
similar share purchase programs. Shareholder servicing agents may waive all or a
portion of their fee.

Distribution and Service Plan

According to Rule 12b-1 under the Investment Company Act of 1940, the Funds have
adopted a Distribution and Service Plan. The Funds do not currently pay expenses
for Class A Shares under this Plan.

Portfolio Management

Investment Quality Bond Fund. Richard T. Heine has been the Portfolio Manager of
the Fund since its inception. A Portfolio Manager and Director with KAM, he has
been in the investment advisory business since 1977.

Diversified Stock Fund. Lawrence G. Babin has been the Portfolio Manager of the
Fund since its inception. A Portfolio Manager and Managing Director of KAM, he
has been in the investment business since 1982.

Small Company Value Fund. Anthony Aveni, Barbara Myers, and Paul Danes have been
the Portfolio Managers of the Small Company Value Fund since its inception. Mr.
Aveni is a Director, the Chief Investment Officer, and a Senior Managing
Director with KAM and has been in the investment business since 1981. Ms. Myers
and Mr. Danes are Portfolio Managers and Directors with KAM and each has been in
the investment business since 1987.

****The Funds are supervised by the Board of Trustees who monitor the services
provided to investors.****

<PAGE>

OTHER SECURITIES AND INVESTMENT PRACTICES

The following table lists some of the types of securities some or all of the
Funds may choose to purchase under normal market conditions. For more
information on ratings and detailed descriptions of each of the investments
below, see the SAI.

o Indicates a "derivative security," whose value is linked to, or derived
from another security, instrument or index.

List of Allowable Investments

U.S. Equity Securities. Can include common stock and securities convertible
into stock of U.S. corporations.

Equity Securities of Foreign Companies Traded on U.S. Exchanges. Can
include common stock, preferred stock, and securities convertible into
stock. Also may include American Depositary Receipts (ADRs) and Global
Depositary Receipts (GDRs).

Preferred Stock. A class of stock that pays dividends at a specified rate
and that has preference over common stock in the payment of dividends and
the liquidation of assets.

U.S. Corporate Debt Obligations. Debt instruments issued by U.S. public
corporations. They may be secured or unsecured.

Real Estate Investment Trusts. Shares of ownership in real estate
investment trusts or mortgages on real estate.

U.S. Government Securities. Securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities. Some are direct obligations
of the U.S. Treasury; others are obligations only of the U.S. agency.

Short-Term Debt Obligations. Includes bankers' acceptances, certificates of
deposit, prime quality commercial paper, Eurodollar obligations, variable
and floating rate notes, cash, and cash equivalents.

Foreign Debt Securities. Debt securities of foreign issuers including
international bonds traded in the United States and abroad denominated in
foreign currencies or U.S. dollars.

Warrants. Rights to purchase equity securities at stated prices for limited
periods of time.

When-Issued and Delayed-Delivery Securities. Securities that are purchased
for delivery at a later time. The market value may change before the
delivery date and the value is included in the NAV of the Fund.

oReceipts. Separately traded interest or principal components of U.S.
Government securities.

Repurchase Agreements. An agreement to sell and repurchase a security at a
stated price plus interest. The seller's obligation is secured by
collateral. Subject to the receipt of an exemptive order from the SEC, the
Adviser may combine repurchase transactions among one or more Victory funds
into a single transaction.

Illiquid Securities. Investments that cannot be readily sold within seven
days in the usual course of business at approximately the price at which a
Fund values them.

oFutures Contracts and Options on Futures Contracts. Contracts involving
the right or obligation to deliver or receive assets or money depending on
the performance of one or more assets or a securities index. To reduce the
effects of leverage, liquid assets equal to the contract commitment are set
aside to cover the commitment. The Funds may invest in futures in an effort
to hedge against market risk or as an asset substitution. The Funds do not
intend to invest in these investments for leverage purposes.

oOptions. A Fund may write, or sell, covered call options on securities
that it owns or on an indexes to hedge its position or to generate
additional income. The Funds do not intend to invest in these investments
for leverage purposes.

<PAGE>

Securities Lending. To generate additional income, a Fund may lend its
portfolio securities. A Fund will receive collateral for the value of the
security plus any interest due. A Fund only will enter into securities
lending arrangements with entities that the Adviser has determined are
creditworthy. Subject to the receipt of an exemptive order from the SEC,
Key Trust Company of Ohio, N.A., the Funds' custodian and lending agent,
may earn a fee based on the amount of income earned on the investment of
collateral.

Asset Backed Securities. Debt securities backed by loans or accounts
receivable originated by banks, credit card companies, or other providers
of credit. These securities may be enhanced by a bank letter of credit or
by insurance coverage provided by a third party.

Convertible or Exchangeable Corporate Debt Obligations. Debt instruments
which may be exchanged or converted to other securities.

Mortgage-Backed Securities. Instruments secured by a mortgage or pools of
mortgages.

Collateralized Mortgage Obligations. Debt obligations that are secured by
mortgage-backed certificates. Some are issued by U.S. government agencies
and instrumentalities.

Zero Coupon Bonds. These securities are purchased at a discount from the
face value. The face value is received at maturity, with no interest
payments before then. These may be subject to greater risk of price
fluctuation.

Variable & Floating Rate Securities. Investment grade instruments, some of
which may be derivatives or illiquid, with interest rates that reset
periodically.

Yankee Securities. Debt instruments issued by non-U.S. issuers and
denominated in U.S. dollars.

Tax, Revenue and Bond Anticipation Notes. Issued in expectation of future
revenues.

Dollar Weighted Effective Average Maturity. This is one measure of the
sensitivity of a debt security's value to changes in interest rates. Longer
term debt securities are usually more volatile than shorter term debt
securities because their prices are generally more sensitive to interest
rate changes. Therefore, the NAV of a fund with a longer dollar weighted
effective average maturity may fluctuate more.

For temporary defensive purposes and for cash management, each Fund may
hold up to 100% of its total assets in cash or short-term money market
instruments. This may reduce the benefit from any upswing in the market and
may cause the Fund to fail to meet its investment objective.

<PAGE>

ADDITIONAL INFORMATION

Statement of Additional Information

The SAI provides a more complete discussion of certain matters contained in this
prospectus and is incorporated by reference.

Shareholder Communications

Semi-Annual and Annual Reports. This prospectus is intended for use in
connection with a variable annuity or variable life insurance contract. As
contract or policy owners, you will receive reports from the participating
insurance companies for which shares of the Funds are the investment vehicle.
These reports will include, among other things, the Funds' unaudited semi-annual
reports and audited annual reports. Each report will show the investments owned
by the Funds and will provide other information about the Funds and their
operations. The Funds' annual report will include a discussion of the market
conditions and investment strategies that significantly affected the Funds'
performance during its last fiscal year. The participating insurance company
will pay the cost of preparing these reports.

Contract and policy owners may obtain information about their investment on any
business day by calling ________________________ Life Insurance Company
toll-free 1-800- _____________ between the hours of ____ and _____, Eastern
Standard Time. Specially trained representatives will answer questions about
your account. In addition, you will receive updated prospectuses or supplements
to this prospectus.

The SAI and the Funds' financial reports are also available from the SEC:

-- You may review the SAI or financial reports at the Public
Reference Room of the Securities Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. (1-800-SEC-0330)

-- You may obtain copies of the SAI or the financial reports for a
fee by calling or writing the SEC's Public Reference Room at the
address or phone number listed above or

-- for free by visiting the SEC's Worldwide Web site at
http://www.sec.gov.

The securities described in this prospectus and the SAI are not offered in any
state in which they may not lawfully be sold. No sales representative, dealer,
or other person is authorized to give any information or make any representation
other than those contained in this prospectus and the SAI.

****If you would like to receive additional copies of any materials at no
charge, please call the Funds at 800-539-FUND.****

Investment Company Act File No. 811-8979

VF-VVI-PRO (11/98)

<PAGE>

LOGO (R)
Victory Funds

PROSPECTUS

THE VICTORY VARIABLE INSURANCE FUNDS

INVESTMENT QUALITY BOND FUND

DIVERSIFIED STOCK FUND

SMALL COMPANY VALUE FUND

CLASS B SHARES

The Victory Variable Insurance Funds offer Class A Shares and Class B Shares.
This Prospectus pertains to Class B Shares only. Participating insurance
companies may request information regarding Class A Shares by calling
1-800-539-FUND.

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED ANY
FUND'S SHARES AS AN INVESTMENT OR DETERMINED WHETHER THIS PROSPECTUS
IS ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING
A CRIME.

November ___, 1998

<PAGE>

TABLE OF CONTENTS

RISK/RETURN SUMMARY

Investment Quality Bond Fund

Diversified Stock Fund

Small Company Value Fund

RISK FACTORS

SHARE PRICE

PERFORMANCE

DIVIDENDS, DISTRIBUTIONS, AND TAXES

INVESTING IN THE VARIABLE INSURANCE FUNDS

How to Purchase Shares

How to Exchange Shares

How to Redeem Shares

Distribution Plan

ORGANIZATION AND MANAGEMENT OF THE FUNDS

OTHER SECURITIES AND INVESTMENT PRACTICES

ADDITIONAL INFORMATION

<PAGE>

RISK/RETURN SUMMARY

INVESTMENT QUALITY BOND FUND

INVESTMENT OBJECTIVE

The Investment Quality Bond Fund seeks to provide a high level of income.

PRINCIPAL STRATEGIES

PRINCIPAL RISKS

o Interest rates rise

o An issuer's credit quality is downgraded

o The Fund must reinvest interest or sale proceeds at lower rates

o The rate of inflation increases

o Political or economic events overseas adversely affect the value of foreign
securities

o The average life of a mortgage-related security is shortened or lengthened

INVESTMENTS

Under normal conditions, the Investment Quality Bond Fund will invest at least
80% of its total assets in the following securities:

o Investment grade corporate securities, including asset-backed securities
and convertible and exchangeable debt securities

o Mortgage-related securities issued by non-governmental entities

o Obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities

o Government mortgage-backed securities

Important Characteristics of the Investment Quality Bond Fund's Investments:

o QUALITY: All instruments will be rated, at the time of purchase, within the
four highest rating categories by S&P, Fitch, Moody's, or another NRSRO,
or, if unrated, be of comparable quality. For more information on ratings,
see the Appendix to the Statement of Additional Information (SAI).

o MATURITY: The dollar-weighted effective average maturity of the Investment
Quality Bond Fund will range from 5 to 15 years. Individual assets held by
the Fund may vary from the average maturity of the Fund. Under certain
market conditions, the Fund's portfolio manager may go outside these
boundaries.

The Investment Quality Bond Fund may also invest in international bonds, foreign
securities, and futures contracts and options related to these securities.

<PAGE>

DIVERSIFIED STOCK FUND

INVESTMENT OBJECTIVE

The Diversified Stock Fund seeks to provide long-term growth of capital.

PRINCIPAL STRATEGIES

PRINCIPAL RISKS

o The stock market goes down

o "Value" stocks fall out of favor with investors

o A company's earnings do not increase as expected

o Political or economic events overseas adversely affect the value of foreign
securities

INVESTMENTS

Under normal market conditions, the Diversified Stock Fund:

o Will invest at least 80% of its total assets in equity securities and
securities convertible or exchangeable into common stock

o May invest up to 20% of its total assets in:
Preferred stocks
Investment-grade corporate debt securities
Short-term debt obligations
U.S. Government obligations

<PAGE>

SMALL COMPANY VALUE FUND

INVESTMENT OBJECTIVE

The Small Company Value Fund seeks to provide long-term growth of capital and
dividend income.

PRINCIPAL STRATEGIES

The Small Company Value Fund pursues its investment objective by investing
primarily in equity securities of small-sized companies. The weighted average
market capitalization of the Small Company Value Fund will be similar to that of
its benchmark, the Standard & Poor's 600 Small Cap Index. (As of June 30, 1998,
the S&P 600 Small Cap Index had a weighted average market capitalization of $1.2
billion.)

PRINCIPAL RISKS

o The stock market goes down

o "Value" and/or small-sized company stocks fall out of favor with investors

o A company's earnings do not increase as expected

INVESTMENTS

The Adviser looks for companies with above average total return potential whose
equity securities are undervalued and are inexpensive relative to historical
measurements, such as price to earnings.

Under normal market conditions the Small Company Value Fund will:

o Invest at least 80% of its total assets in:
Equity securities
Securities convertible or exchangeable into common stock
of small-sized companies
o Invest up to 20% of its total assets in:
Investment-grade corporate debt securities
Preferred stocks
Short-term debt obligations
U.S. Government obligations

<PAGE>

WHO MAY WANT TO INVEST IN THE FUNDS?

o investors who want a diversified portfolio

o long-term investors with a particular goal, like saving for retirement

o investors who want potential growth over time

o investors who can tolerate fluctuation in net asset value (NAV) per share

WHO MAY WANT TO INVEST IN THE:

o INVESTMENT QUALITY BOND FUND? Investors seeking a high level of income and
who want a portfolio of investment grade debt securities.

o DIVERSIFIED STOCK FUND? Investors who are willing to take more risk in the
short-term for potentially higher gains in the long-term.

o SMALL COMPANY VALUE FUND? Investors who are comfortable with assuming the
added risks associated with small company stocks in return for the
possibility of long-term rewards.

THE FUNDS MAY NOT BE APPROPRIATE FOR INVESTORS WHO:

-- are not willing to take any risk that they may lose money on their
investment

-- want absolute stability of their investment principal

-- want to invest in a particular sector or in particular industries,
countries, or regions

KEEP IN MIND THAT MUTUAL FUND SHARES:

-- are not deposits of any bank

-- are not insured by the Federal Deposit Insurance Corporation or any
other government agency

-- are subject to investment risks, including possible loss of the
principal amount invested

RISK FACTORS

THE FOLLOWING RISKS ARE COMMON TO ALL MUTUAL FUNDS:

o MARKET RISK is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a result
of this fluctuation, a security may be worth more or less than the price a
Fund originally paid for it or less than the security was worth at an
earlier time. Market risk may affect a single security, an industry, a
sector of the economy, or the entire market and is common to all
investments.

o MANAGER RISK is the risk that a Fund's portfolio manager may use a strategy
that does not produce the intended result. Manager risk also refers to the
possibility that the portfolio manager may fail to execute a Fund's
investment strategy effectively and, thus, fail to achieve the Fund's
investment objective.

o YEAR 2000 RISK. Like other mutual funds, each of the Funds could be
adversely affected if the computer systems used by their service providers,
including shareholder servicing agents and participating insurance
companies, do not properly process and calculate date-related information.
The Funds' service providers have been actively updating their systems to
be able to process year 2000 data. However, there can be no

<PAGE>

assurance that these steps will be adequate to avoid a temporary service
disruption or any adverse impact on the Funds.

THE FOLLOWING RISKS ARE COMMON TO MUTUAL FUNDS THAT INVEST IN DEBT SECURITIES:

o INTEREST RATE RISK. The value of a debt security typically changes in the
opposite direction from a change in interest rates. When interest rates go
up, the value of a fixed-rate security typically goes down. When interest
rates go down, the value of these securities typically goes up. Generally,
the market values of securities with longer maturities are more sensitive
to changes in interest rates.

o INFLATION RISK is the risk that inflation will erode the purchasing power
of the cash flows generated by debt securities held by a Fund. Fixed-rate
debt securities are more susceptible to this risk than floating-rate debt
securities.

o REINVESTMENT RISK is the risk that when interest income is reinvested,
interest rates will have declined so that income must be reinvested at a
lower interest rate. Generally, interest rate risk and reinvestment risk
have offsetting effects.

o CREDIT (OR DEFAULT) RISK is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal. Although
the Funds generally invest only in high-quality securities, the interest or
principal payments may not be insured or guaranteed on all securities.
Credit risk is measured by NRSROs such as S&P, Fitch, or Moody's.

THE FOLLOWING RISKS ARE COMMON TO MUTUAL FUNDS THAT INVEST IN MORTGAGE-RELATED
SECURITIES:

o PREPAYMENT RISK. Prepayments of principal on mortgage-related securities
affect the average life of a pool of mortgage-related securities. Mortgage
prepayments are affected by the level of interest rates and other factors.
In periods of rising interest rates, the prepayment rate tends to decrease,
lengthening the average life of a pool of mortgage-related securities. In
periods of falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool of mortgage-related securities.
Prepayment risk is the risk that, because prepayments generally occur when
interest rates are falling, a Fund may have to reinvest the proceeds from
prepayments at lower interest rates.

o EXTENSION RISK is the risk that anticipated payments on principal may not
occur, typically because of a rise in interest rates, and the expected
maturity of the security will increase. During periods of rapidly rising
interest rates, the anticipated maturity of a security may be extended past
what the Adviser anticipated that it would be, affecting the maturity and
volatility of a Fund.

THE FOLLOWING RISK IS COMMON TO MUTUAL FUNDS THAT INVEST IN EQUITY SECURITIES:

o EQUITY RISK is the risk that the value of the security will fluctuate in
response to changes in earnings or other conditions affecting the issuer's
profitability. Unlike debt securities, which have preference to a company's
earnings and cash flow, equity securities are entitled to the residual
value after the company meets its other obligations. For example, in the
event of bankruptcy, holders of debt securities have priority over holders
of equity securities to a company's assets.

THE FOLLOWING RISKS ARE COMMON TO MUTUAL FUNDS THAT INVEST IN FOREIGN
SECURITIES:

o FOREIGN ISSUER AND CURRENCY RISK. Compared to U.S. and Canadian companies,
there generally is less publicly available information about foreign
companies and there may be less governmental regulation and supervision of
foreign stock exchanges, brokers, and listed companies. Foreign issuers may
not be subject to the uniform accounting, auditing, and financial reporting
standards and practices used by domestic issuers.

<PAGE>

THE FOLLOWING RISK IS COMMON TO MUTUAL FUNDS THAT INVEST IN FUTURES AND OPTIONS
CONTRACTS:

o CORRELATION RISK. Futures and options contracts can be used in an effort to
hedge against certain risks. Generally, an effective hedge generates an
offset to gains or losses of other investments made by a Fund. Correlation
risk is the risk that a hedge created using futures or options contracts
(or any derivative, for that matter) does not, in fact, respond to economic
conditions in the manner the portfolio manager expected. In such a case,
the futures or options contract hedge may not generate gains sufficient to
offset losses and may actually generate losses.

SHARE PRICE

NAV = Total Assets - Liabilities
--------------------------
Number of Shares Outstanding

PERFORMANCE

The Funds have been recently organized and do not yet have a performance record.
The Investment Quality Bond Fund and Diversified Stock Fund, however, have
essentially the same portfolio management team, investment objectives, policies,
and restrictions as other investment companies and separate accounts advised by
KAM over the time period shown (the Bond Composite and the Stock Composite,
respectively). Similarly, the Small Company Value Fund has essentially the same
portfolio management team, investment objective, policies and restrictions as
the Key Trust Small Capitalization Value Fund, a fund managed by KAM for Key
Trust fiduciary clients (the Common Trust Fund). Since each Fund will operate in
substantially the same manner as its corresponding comparison Composite or
Common Trust Fund, past performance may be considered relevant. HOWEVER, PAST
PERFORMANCE DOES NOT NECESSARILY INDICATE HOW A FUND WILL PERFORM IN THE FUTURE.

8
<PAGE>

The performance figures shown for the Bond Composite and the Stock Composite
reflect the deduction of weighted average historical fees and expenses paid by
those Composites, and not the fees and expenses to be paid by the corresponding
Variable Insurance Funds.

The average annual total return table also includes a comparison of the
performance of each Composite with an appropriate benchmark index.

If the performance had been adjusted for operating expenses, the total return
data would be lower.

<PAGE>

AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1997*
----------------------------------------

One Year Three Years Five Years Ten Years

Bond Composite _______% _______% _______% _______%

Lehman Aggregate Bond Index _______% _______% _______% _______%

Diversified Stock Composite _______% _______% _______% _______%

S&P 500 Stock Index _______% _______% _______% _______%

Small Company Composite _______% _______% _______% _______%

S&P 600 SmallCap Index _______% _______% _______% _______%

TOTAL RETURNS
FOR THE YEARS ENDED DECEMBER 31*
--------------------------------

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----

Bond Composite ---- ---- ---- ---- ---- ---- ---- ---- ---- ----

Diversified Stock ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Composite

Small Company
Composite ---- ---- ---- ---- ---- ---- ---- ---- ---- ----

</TABLE>

9
<PAGE>

BEST QUARTER* WORST QUARTER*
------------- --------------

Bond Composite

Diversified Stock Composite

Small Company Composite

* KAM has prepared this report in compliance with the Performance
Presentation Standards of the Association for Investment Management and
Research (AIMR-PPS(TM)).

****Past performance is not a guarantee of future results.****

DIVIDENDS, DISTRIBUTIONS, AND TAXES

Each Fund expects to distribute substantially all of its ordinary income and
capital gains each year. Ordinarily, the each Fund declares and pays dividends
from its net investment income quarterly. Capital gains distributions, if any,
from the Funds will be made annually. In addition, a Fund may occasionally be
required to make supplemental dividend or capital gains distributions at some
other time during the year.

All dividend distributions made by each Fund will be automatically reinvested in
additional shares of the Fund.

IMPORTANT INFORMATION ABOUT TAXES

THE TAX STATUS OF YOUR INVESTMENT IN A FUND DEPENDS UPON THE FEATURES OF YOUR
CONTRACT. FOR FURTHER INFORMATION, PLEASE REFER TO THE CONTRACT PROSPECTUS.

INVESTING IN THE VARIABLE INSURANCE FUNDS

HOW TO PURCHASE SHARES

10
<PAGE>

HOW TO EXCHANGE SHARES

You may give your Investment Professional instructions to exchange shares of one
Fund for shares of another Fund. The exchange will be made at relative net asset
value.

HOW TO REDEEM SHARES

DISTRIBUTION PLAN

The Victory Variable Insurance Funds have adopted a plan consistent with Rule
12b-1 under the Investment Company Act of 1940, as amended, on behalf of each
Fund's Class B Shares (the Plan). According to the Plan, each Fund may pay BISYS
Fund Services, Inc., the Funds' distributor (for payment to participating
insurance companies), a fee of up to .25% of the average daily net assets of its
Class B Shares for various costs incurred or paid by the insurance companies in
distributing those Shares and providing services to Class B shareholders.
Because Rule 12b-1 fees are paid out of a Fund's assets on an on-going basis,
over time these fees will increase the cost of your investment and may cost you
more than paying other types of sales charges.

Expenses that may be reimbursed under the Plan include:

o printing and mailing Fund Prospectuses, Statements of Additional
Information and financial reports

o preparing and mailing Fund marketing materials

o holding promotional seminars and sales meetings

o obtaining and providing Fund performance information

o training and compensating sales personnel

ORGANIZATION AND MANAGEMENT OF THE FUNDS

ABOUT VICTORY

Each Fund is a series of the Trust, a group of three distinct investment
portfolios, organized as a Delaware business trust.

The Board of Trustees of the Trust has the overall responsibility for the
management of the Funds. They are elected by the shareholders.

11
<PAGE>

FEES AND EXPENSES

THE INVESTMENT ADVISER

KAM will be paid a monthly advisory fee at an annual rate based on the average
daily net assets of each Fund as follows:

Investment Quality Bond Fund -- 0.20%
Diversified Stock Fund -- 0.30%
Small Company Value Fund -- 0.30%

SHAREHOLDER SERVICING PLAN

The Victory Variable Insurance Funds have adopted a Shareholder Servicing Plan
for each class of the Funds' shares. A shareholder servicing agent performs a
number of services for its customers who are Fund shareholders, such as
establishing and maintaining accounts and records, processing dividend payments,
arranging for bank wires, assisting in transactions, and changing account
information. For these services, Class B Shares of each Fund pay a fee at an
annual rate of up to .25% of its average daily net assets serviced by the agent.
The Funds may enter into these agreements with KeyBank National Association and
its affiliates, and with other financial institutions. The Funds may pay a
servicing fee to broker-dealers and others who sponsor "no transaction fee" or
similar share purchase programs. Shareholder servicing agents may waive all or a
portion of their fee.

PORTFOLIO MANAGEMENT

****The Funds are supervised by the Board of Trustees who monitor the services
provided to investors.****

12
<PAGE>

OTHER SECURITIES AND INVESTMENT PRACTICES

o Indicates a "derivative security," whose value is linked to, or derived
from another security, instrument or index.

LIST OF ALLOWABLE INVESTMENTS

U.S. EQUITY SECURITIES. Can include common stock and securities convertible
into stock of U.S. corporations.

EQUITY SECURITIES OF FOREIGN COMPANIES TRADED ON U.S. EXCHANGES. Can
include common stock, preferred stock, and securities convertible into
stock. Also may include American Depositary Receipts (ADRs) and Global
Depositary Receipts (GDRs).

PREFERRED STOCK. A class of stock that pays dividends at a specified rate
and that has preference over common stock in the payment of dividends and
the liquidation of assets.

U.S. CORPORATE DEBT OBLIGATIONS. Debt instruments issued by U.S. public
corporations. They may be secured or unsecured.

REAL ESTATE INVESTMENT TRUSTS. Shares of ownership in real estate
investment trusts or mortgages on real estate.

U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities. Some are direct obligations
of the U.S. Treasury; others are obligations only of the U.S. agency.

SHORT-TERM DEBT OBLIGATIONS. Includes bankers' acceptances, certificates of
deposit, prime quality commercial paper, Eurodollar obligations, variable
and floating rate notes, cash, and cash equivalents.

FOREIGN DEBT SECURITIES. Debt securities of foreign issuers including
international bonds traded in the United States and abroad denominated in
foreign currencies or U.S. dollars.

WARRANTS. Rights to purchase equity securities at stated prices for limited
periods of time.

WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Securities that are purchased
for delivery at a later time. The market value may change before the
delivery date and the value is included in the NAV of the Fund.

oRECEIPTS. Separately traded interest or principal components of U.S.
Government securities.

REPURCHASE AGREEMENTS. An agreement to sell and repurchase a security at a
stated price plus interest. The seller's obligation is secured by
collateral. Subject to the receipt of an exemptive order from the SEC, the
Adviser may combine repurchase transactions among one or more Victory funds
into a single transaction.

ILLIQUID SECURITIES. Investments that cannot be readily sold within seven
days in the usual course of business at approximately the price at which a
Fund values them.

oFUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Contracts involving
the right or obligation to deliver or receive assets or money depending on
the performance of one or more assets or a securities index. To reduce the
effects of leverage, liquid assets equal to the contract commitment are set
aside to cover the commitment. The Funds may invest in futures in an effort
to hedge against market risk or as an asset substitution. The Funds do not
intend to invest in these investments for leverage purposes.

oOPTIONS. A Fund may write, or sell, covered call options on securities
that it owns or on an indexes to hedge its position or to generate
additional income. The Funds do not intend to invest in these investments
for leverage purposes.

13
<PAGE>

SECURITIES LENDING. To generate additional income, a Fund may lend its
portfolio securities. A Fund will receive collateral for the value of the
security plus any interest due. A Fund only will enter into securities
lending arrangements with entities that the Adviser has determined are
creditworthy. Subject to the receipt of an exemptive order from the SEC,
Key Trust Company of Ohio, N.A., the Funds' custodian and lending agent,
may earn a fee based on the amount of income earned on the investment of
collateral.

ASSET BACKED SECURITIES. Debt securities backed by loans or accounts
receivable originated by banks, credit card companies, or other providers
of credit. These securities may be enhanced by a bank letter of credit or
by insurance coverage provided by a third party.

CONVERTIBLE OR EXCHANGEABLE CORPORATE DEBT OBLIGATIONS. Debt instruments
which may be exchanged or converted to other securities.

MORTGAGE-BACKED SECURITIES. Instruments secured by a mortgage or pools of
mortgages. COLLATERALIZED MORTGAGE OBLIGATIONS. Debt obligations that are
secured by mortgage-backed certificates. Some are issued by U.S. government
agencies and instrumentalities.

ZERO COUPON BONDS. These securities are purchased at a discount from the
face value. The face value is received at maturity, with no interest
payments before then. These may be subject to greater risk of price
fluctuation.

VARIABLE & FLOATING RATE SECURITIES. Investment grade instruments, some of
which may be derivatives or illiquid, with interest rates that reset
periodically.

YANKEE SECURITIES. Debt instruments issued by non-U.S. issuers and
denominated in U.S. dollars.

TAX, REVENUE AND BOND ANTICIPATION NOTES. Issued in expectation of future
revenues.

DOLLAR WEIGHTED EFFECTIVE AVERAGE MATURITY. This is one measure of the
sensitivity of a debt security's value to changes in interest rates. Longer
term debt securities are usually more volatile than shorter term debt
securities because their prices are generally more sensitive to interest
rate changes. Therefore, the NAV of a fund with a longer dollar weighted
effective average maturity may fluctuate more.
- --------------
For temporary defensive purposes and for cash management, each Fund may
hold up to 100% of its total assets in cash or short-term money market
instruments. This may reduce the benefit from any upswing in the market and
may cause the Fund to fail to meet its investment objective.

14
<PAGE>

ADDITIONAL INFORMATION

STATEMENT OF ADDITIONAL INFORMATION

The SAI provides a more complete discussion of certain matters contained in this
prospectus and is incorporated by reference.

SHAREHOLDER COMMUNICATIONS

The SAI and the Funds' financial reports are also available from the SEC:

-- You may review the SAI or financial reports at the Public Reference
Room of the Securities Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. (1-800-SEC-0330)

-- You may obtain copies of the SAI or the financial reports for a fee by
calling or writing the SEC's Public Reference Room at the address or
phone number listed above or

-- for free by visiting the SEC's Worldwide Web site at
http://www.sec.gov.

****If you would like to receive additional copies of any materials at no
charge, please call the Funds at 800-539-FUND.****

Investment Company Act File No. 811-8979

VF-VVI-PRO (11/98)

<PAGE>

The information in this Statement of Additional Information ("SAI") is not
complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This SAI is not an offer to sell these
securities and is not soliciting an offer to buy
these securities in any state where the offer or
sale is not permitted.

STATEMENT OF ADDITIONAL INFORMATION

THE VICTORY VARIABLE INSURANCE FUNDS

Investment Quality Bond Fund
Diversified Stock Fund
Small Company Value Fund

November ___, 1998

This SAI is not a prospectus, but should be read in conjunction with the Class A
Share prospectus and Class B Share prospectus of The Victory Variable Insurance
Funds (the "Prospectuses"), dated November 1, 1998 as amended or supplemented
from time to time. This SAI is incorporated by reference in its entirety into
the Prospectuses. Copies of the Prospectuses may be obtained by writing The
Victory Variable Insurance Funds at P.O Box 8527, Boston, MA 02266-8527, or by
calling toll free 800-539-FUND or 800-539-3863.

INVESTMENT ADVISER AND SUB-ADMINISTRATOR Key Asset Management Inc.

ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services

TRANSFER AGENT
State Street Bank and Trust Company

DIVIDEND DISBURSING AGENT
AND SERVICING AGENT
Boston Financial Data Services, Inc.

CUSTODIAN
Key Trust Company of Ohio, N.A.

INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP

COUNSEL
Kramer, Levin, Naftalis & Frankel

<PAGE>

Table of Contents

INVESTMENT OBJECTIVES AND INVESTMENT POLICIES AND LIMITATIONS

FUNDAMENTAL RESTRICTIONS OF THE FUNDS
ON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS
INSTRUMENTS IN WHICH THE FUNDS CAN INVEST
U.S. Corporate Debt Obligations
Temporary Defensive Measures -- Short-Term Obligations
Short-Term Corporate Obligations
Demand Features
Bankers' Acceptances
Certificates of Deposit
Eurodollar Certificates of Deposit
Yankee Certificates of Deposit
Eurodollar Time Deposits
Canadian Time Deposits
Commercial Paper
International Bonds
Foreign Debt Securities Repurchase Agreements
Reverse Repurchase Agreements
Short-Term Funding Agreements
Variable Amount Master Demand Notes
Variable Rate Demand Notes
Variable and Floating Rate Notes
Extendible Debt Securities
Receipts
Zero-Coupon Bonds
Loans and Other Direct Debt Instruments
Securities of Other Investment Companies
U.S. Government Obligations
When-Issued Securities
Delayed-Delivery Transactions
Mortgage-Backed Securities
In General
U.S. Government Mortgage-Backed Securities
GNMA Certificates
FHLMC Securities
FNMA Securities
Collateralized Mortgage Obligations
Non-Government Mortgage-Backed Securities
Asset-Backed Securities
Real Estate Investment Trusts
Preferred Stock
Convertible Securities
Futures and Options
Futures Contracts
Restrictions on the Use of Futures Contracts
Risk Factors in Futures Transactions
Options
Puts
Illiquid Investments
Restricted Securities

<PAGE>

Securities Lending Transactions
Short Sales Against-the-Box
Investment-Grade and High Quality Investments
Participation Interests
Warrants
Foreign Investments

VALUATION OF PORTFOLIO SECURITIES FOR THE INVESTMENT QUALITY BOND FUND

VALUATION OF PORTFOLIO SECURITIES FOR THE EQUITY FUNDS

PERFORMANCE

ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION

DIVIDENDS AND DISTRIBUTIONS

TAXES

TRUSTEES AND OFFICERS

ADVISORY AND OTHER CONTRACTS

ADDITIONAL INFORMATION

APPENDIX

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

The Victory Variable Insurance Funds (the "Trust") is an open-end management
investment company consisting of three series (each a "Fund") of units of
beneficial interest ("shares"). The outstanding shares represent interests in
the Investment Quality Bond Fund (sometimes referred to as the "Bond Fund"), the
Diversified Stock Fund and the Small Company Value Fund. This SAI relates to the
Class A and Class B shares of the Funds. Much of the information contained in
this SAI expands on subjects discussed in the Prospectuses. Capitalized terms
not defined herein are used as defined in the Prospectuses. No investment in
shares of a Fund should be made without first reading the Prospectuses.

INVESTMENT OBJECTIVES AND INVESTMENT POLICIES AND LIMITATIONS

Each Fund's investment objective is fundamental and may not be changed without a
vote of the holders of a majority of the Fund's outstanding voting securities.
There can be no assurance that a Fund will achieve its investment objective.

ADDITIONAL INFORMATION REGARDING FUND INVESTMENTS.

The following policies and limitations supplement the Funds' investment policies
set forth in the Prospectuses. The Funds' investments in the following
securities and other financial instruments are subject to the other investment
policies and limitations described in the Prospectuses and this SAI.

Unless otherwise noted in the Prospectuses or this SAI, a Fund may invest no
more than 5% of its total assets in any of the securities or financial
instruments described below (unless the context of the Prospectuses or this SAI
requires otherwise).

Unless otherwise noted, whenever an investment policy or limitation states a
maximum percentage of a Fund's assets that may be invested in any security or
other asset, or sets forth a policy regarding quality standards, such standard
or percentage limitation will be determined immediately after and as a result of
the Fund's acquisition of such security or other asset except in the case of
borrowing (or other activities that may be deemed to result in the issuance of a
"senior security" under the Investment Company Act of 1940, as amended (the
"1940 Act")). Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with a Fund's investment policies and limitations. If the value of a
Fund's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.

The investment policies of a Fund may be changed without an affirmative vote of
the holders of a majority of that Fund's outstanding voting securities unless
(1) a policy expressly is deemed to be a fundamental policy of the Fund or (2) a
policy expressly is deemed to be changeable only by such majority vote. A Fund
may, following notice to its shareholders, take advantage of other investment
practices which presently are not contemplated for use by the Fund or which
currently are not available but which may be developed to the extent such
investment practices are both consistent with the Fund's investment objective
and legally permissible for the Fund. Such investment practices, if they arise,
may involve risks which exceed those involved in the activities described in a
Fund's Prospectus.

The following sections list each Fund's investment objective and its investment
policies, limitations, and restrictions. The securities in which the Funds can
invest and the risks associated with these securities are discussed in the
section "Instruments in Which the Funds Can Invest." When this SAI refers to
only the Diversified Stock Fund and the Small Company Value Fund, they will be
called the "Equity Funds."

<PAGE>

FUNDAMENTAL RESTRICTIONS OF THE FUNDS

The following Fundamental Restrictions may not be changed with respect to a Fund
without the affirmative vote of the holders of a majority of the Fund's
outstanding shares. Such majority is defined as the lesser of (a) 67% or more of
the shares of the Fund present at a meeting at which the holders of more than
50% of the outstanding shares of the Fund are represented in person or by proxy,
or (b) more than 50% of the outstanding shares of the Fund.

1. SENIOR SECURITIES

No Fund may:

Issue any senior security (as defined in the 1940 Act), except that (a) each
Fund may engage in transactions that may result in the issuance of senior
securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) each Fund may acquire
other securities, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the restrictions set forth
below, the Fund may borrow money as authorized by the 1940 Act.

2. UNDERWRITING

The Funds may not:

Underwrite securities issued by others, except to the extent that the Fund may
be considered an underwriter within the meaning of the Securities Act of 1933,
as amended (the "Securities Act"), in the disposition of restricted securities.

3. BORROWING

Each Fund may not:

Borrow money, except that (a) each Fund may enter into commitments to purchase
securities in accordance with its investment program, including delayed-delivery
and when-issued securities and reverse repurchase agreements, provided that the
total amount of any such borrowing does not exceed 33 1/3 % of the Fund's total
assets; and (b) each Fund may borrow money for temporary or emergency purposes
in an amount not exceeding 5% of the value of its total assets at the time when
the loan is made. Any borrowings representing more than 5% of a Fund's total
assets must be repaid before the Fund may make additional investments.

4. LENDING

Each Fund may not:

Lend any security or make any other loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, but this limitation does not
apply to purchases of publicly issued debt securities or to repurchase
agreements.

<PAGE>

NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS

1. ILLIQUID SECURITIES

Each Fund:

Will not invest more than 15% of its net assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be disposed
of promptly within seven days and in the usual course of business at
approximately the price at which the Fund has valued them. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule
144A, securities offered pursuant to Section 4(2) of, or securities otherwise
subject to restrictions or limitations on resale under the Securities Act
("Restricted Securities") shall not be deemed illiquid solely by reason of being
unregistered. Key Asset Management Inc., the Funds' investment adviser ("KAM" or
the "Adviser"), determines whether a particular security is deemed to be liquid
based on the trading markets for the specific security and other factors.

2. SHORT SALES AND PURCHASES ON MARGIN

Each Fund:

Will not make short sales of securities, other than short sales "against the
box," or purchase securities on margin except for short-term credits necessary
for clearance of portfolio transactions, provided that this restriction will not
be applied to limit the use of options, futures contracts and related options,
in the manner otherwise permitted by the investment restrictions, policies, and
investment program of the Fund.

3. OTHER INVESTMENT COMPANIES

Each Fund:

May invest up to 5% of their total assets in the securities of any one
investment company, but may not own more than 3% of the securities of any one
investment company or invest more than 10% of its total assets in the securities
of other investment companies.

The Funds may not:

Purchase the securities of any registered open-end investment company or
registered unit investment trust in reliance on Section 12(d)(1)(G) or Section
12(d)(1)(F) of the 1940 Act, which permits operation as a "fund of funds."

4. REAL ESTATE

Each Fund may not:

Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent each Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business). Investments by the Funds in
securities backed by mortgages on real estate or in marketable securities of
companies engaged in such activities are not excluded.

<PAGE>

5. COMMODITIES

Each Fund may not:

Purchase or sell physical commodities unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Funds from
purchasing or selling options and futures contracts or from investing in
securities or other instruments backed by physical commodities).

6. CONCENTRATION

Each Fund may not:

Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry. In the utilities
category, the industry shall be determined according to the service provided.
For example, gas, electric, water and telephone will be considered as separate
industries.

INSTRUMENTS IN WHICH THE FUNDS CAN INVEST

The following table lists some of the types of securities each of the Funds may
choose to purchase under normal market conditions. Unless otherwise stated, the
indicated percentage relates to a Fund's total assets.

INVESTMENTS COMMON TO EACH FUND
-------------------------------

<S> <C> <C> <C>
Preferred Stock - 20% When-Issued and - 33 1/3%
Delayed-Delivery
Securities

Receipts - 20% Illiquid Securities - 15% of net assets

Futures Contracts and - 5% in margins and Securities Lending - 33 1/3%
Options on Futures premiums; 33-1/3%
Contracts subject to futures or
options on futures

U.S. Corporate Debt - Bond Fund: no limit; U.S. Government - Bond Fund: no limit;
Obligations Securities
Equity Funds: 20% Equity Funds: 20%

Short-Term Debt - Bond Fund: 35%; Repurchase - Bond Fund: 35%;
Obligations Agreements
Equity Funds: 20% Equity Funds: 20%

Restricted Securities - Bond Fund: no limit; Convertible or - Bond Fund: no limit;
Exchangeable
Equity Funds: 20% Corporate Debt Equity Funds: 80%
Obligations to 100% (included
in limit for U.S.
equity securities)

</TABLE>

<PAGE>

INVESTMENTS OF THE BOND FUND ONLY

<S> <C> <C> <C>
Foreign Debt Securities - 20% Asset Backed - 35%
Securities

Mortgage-Backed - No limit Collateralized - No limit
Securities Mortgage Obligations

Zero Coupon Bonds - 20% Variable & Floating - No limit
Rate Securities

Yankee Securities 20% Tax, Revenue and - No limit
Bond Anticipation
Notes

Dollar Weighted - 5 - 15 years
Effective Average
Maturity

</TABLE>

INVESTMENTS OF THE EQUITY FUNDS ONLY
------------------------------------

Equity Securities of Foreign Companies - Diversified Stock Fund: 10%;
Traded on U.S. Exchanges
Small Company Value Fund: 5%

Warrants - 10%

Real Estate Investment Trusts - 25%

Options - 25% in covered calls

The instruments in which the Funds can invest, according to their investment
policies and limitations, are described below.

The following paragraphs provide a brief description of some of the types of
securities in which the Funds may invest in accordance with their investment
objective, policies, and limitations, including certain transactions the Funds
may make and strategies they may adopt. The following also contains a brief
description of certain risk factors. The Funds may, following notice to their
shareholders, take advantage of other investment practices which presently are
not contemplated for use by the Funds or which currently are not available but
which may be developed, to the extent such investment practices are both
consistent with a Fund's investment objective and are legally permissible for
the Fund. Such investment practices, if they arise, may involve risks which
exceed those involved in the activities described in the Prospectuses and this
SAI.

U.S. CORPORATE DEBT OBLIGATIONS. U.S. Corporate Debt Obligations include bonds,
debentures, and notes. Debentures represent unsecured promises to pay, while
notes and bonds may be secured by mortgages on real property or security
interests in personal property. Bonds include, but are not limited to, debt
instruments with maturities of approximately one year or more, debentures,
mortgage-related securities, stripped government securities, and zero coupon
obligations. Bonds, notes, and debentures in which the Funds may invest may
differ in interest rates, maturities, and times of issuance. The market value of
a Fund's 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 price of longer maturity securities are also subject to
greater market fluctuations as a result of changes in interest rates.

<PAGE>

Changes by recognized agencies in the rating of any fixed income security and in
the ability of an issuer to make payments of interest and principal also affect
the value of these investments. Except under conditions of default, changes in
the value of a Fund's securities will not affect cash income derived from these
securities but will affect the Fund's net asset value.

TEMPORARY DEFENSIVE MEASURES -- SHORT-TERM OBLIGATIONS. These include high
quality, short-term obligations such as domestic and foreign commercial paper
(including variable-amount master demand notes), bankers' acceptances,
certificates of deposit and demand and time deposits of domestic and foreign
branches of U.S. banks and foreign banks, and repurchase agreements. (See
"Foreign Securities" for a description of risks associated with investments in
foreign securities.) Each Fund may hold up to 100% of its assets in these
instruments for temporary defensive purposes, which may result in performance
that is inconsistent with its investment objective.

SHORT-TERM CORPORATE OBLIGATIONS. Corporate obligations are bonds issued by
corporations and other business organizations in order to finance their
long-term credit needs. Corporate bonds in which a Fund may invest generally
consist of those rated in the two highest rating categories of a nationally
recognized statistical rating organization ("NRSRO") that possess many favorable
investment attributes. In the lower end of this category, credit quality may be
more susceptible to potential future changes in circumstances.

DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.

BANKERS' ACCEPTANCES. Bankers' Acceptances are negotiable drafts or bills of
exchange typically drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' Acceptances will be those guaranteed by domestic and foreign banks, if
at the time of purchase such banks have capital, surplus, and undivided profits
in excess of $100,000,000 (as of the date of their most recently published
financial statements).

CERTIFICATES OF DEPOSIT. Certificates of Deposit are negotiable certificates
issued against funds deposited in a commercial bank or a savings and loan
association for a definite period of time and earning a specified return.
Certificates of Deposit and demand and time deposits invested in by a Fund will
be those of domestic and foreign banks and savings and loan associations, if (a)
at the time of purchase such financial institutions have capital, surplus, and
undivided profits in excess of $100 million (as of the date of their most
recently published financial statements) or (b) the principal amount of the
instrument is insured in full by the Federal Deposit Insurance Corporation (the
"FDIC") or the Savings Association Insurance Fund.

EURODOLLAR CERTIFICATES OF DEPOSIT are U.S. dollar-denominated certificates of
deposit issued by branches of foreign and domestic banks located outside the
United States.

YANKEE CERTIFICATES OF DEPOSIT are certificates of deposit issued by a U.S.
branch of a foreign bank denominated in U.S. dollars and held in the United
States.

EURODOLLAR TIME DEPOSITS are U.S. dollar-denominated deposits in a foreign
branch of a U.S. bank or a foreign bank.

<PAGE>

CANADIAN TIME DEPOSITS are U.S. dollar-denominated certificates of deposit
issued by Canadian offices of major Canadian Banks.

COMMERCIAL PAPER. Commercial paper is unsecured promissory notes issued by
corporations. Except as noted below with respect to variable amount master
demand notes, issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.

The Funds will purchase only commercial paper rated in one of the two highest
categories at the time of purchase by an NRSRO or, if not rated, found by the
Trustees to present minimal credit risks and to be of comparable quality to
instruments that are rated high quality (i.e., in one of the two top ratings
categories) by an NRSRO that is neither controlling, controlled by, or under
common control with the issuer of, or any issuer, guarantor, or provider of
credit support for, the instruments. For a description of the rating symbols of
each NRSRO see the Appendix to this SAI.

INTERNATIONAL BONDS. International Bonds include Euro and Yankee obligations,
which are U.S. dollar-denominated international bonds for which the primary
trading market is in the United States ("Yankee Bonds"), or for which the
primary trading market is abroad ("Eurodollar Bonds"). International Bonds also
include Canadian and Supranational Agency Bonds (e.g., International Monetary
Fund). (See "Foreign Debt Securities" for a description of risks associated with
investments in foreign securities.)

FOREIGN DEBT SECURITIES. Investments in securities of foreign companies
generally involve greater risks than are present in U.S. investments. Compared
to U.S. and Canadian companies, there generally is less publicly available
information about foreign companies, and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign companies generally are not subject to uniform accounting,
auditing, and financial reporting standards, practices, and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid, and their prices more volatile, than securities of
comparable U.S. companies. Settlement of transactions in some foreign markets
may be delayed or may be less frequent than in the U.S., which could affect the
liquidity of a Fund's investment. In addition, with respect to some foreign
countries, there is the possibility of nationalization, expropriation, or
confiscatory taxation; limitations on the removal of securities, property, or
other assets of a Fund; there may be political or social instability; there may
be increased difficulty in obtaining legal judgments; or diplomatic developments
which could affect U.S. investments in those countries. The Adviser will take
such factors into consideration in managing a Fund's investments. A Fund will
not hold foreign currency in amounts exceeding 5% of its assets as a result of
such investments.

REPURCHASE AGREEMENTS. Securities held by a Fund may be subject to Repurchase
Agreements. Under the terms of a Repurchase Agreement, a Fund would acquire
securities from financial institutions or registered broker-dealers deemed
creditworthy by the Adviser pursuant to guidelines adopted by the Trustees,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest).

If the seller were to default on its repurchase obligation or become insolvent,
a Fund would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund is delayed pending
court action.

REVERSE REPURCHASE AGREEMENTS. A Fund may borrow funds for temporary purposes by
entering into Reverse Repurchase Agreements. These Agreements are considered to
be borrowings under the 1940 Act. Pursuant to such agreement, a Fund would sell
a portfolio security to a financial institution such as a bank and a
broker-dealer, and agree to repurchase such security at a mutually agreed-upon
date and price. At the time a Fund enters into a Reverse Repurchase Agreement,
it will place in a segregated custodial account liquid assets consistent with
the Fund's investment restrictions having a value equal to the repurchase price
(including accrued interest). The collateral will be marked-to-market on a daily
basis, and will be

<PAGE>

monitored continuously to ensure that such equivalent value is maintained.
Reverse Repurchase Agreements involve the risk that the market value of the
securities sold by a Fund may decline below the price at which the Fund is
obligated to repurchase the securities.

SHORT-TERM FUNDING AGREEMENTS. A Fund may invest in Short-Term Funding
Agreements (sometimes referred to as "GICs") issued by insurance companies.
Pursuant to such agreements, a Fund makes cash contributions to a deposit fund
of the insurance company's general account. The insurance company then credits
the Fund, on a monthly basis, guaranteed interest which is based on an index.
The Short-Term Funding Agreement provides that this guaranteed interest will not
be less than a certain minimum rate. Because the principal amount of a
Short-Term Funding Agreement may not be received from the insurance company on
seven days notice or less, the agreement is considered to be an illiquid
investment and, together with other instruments in a Fund which are not readily
marketable, will not exceed 15% of a Fund's net assets. In determining
dollar-weighted average portfolio maturity, a Short-Term Funding Agreement will
be deemed to have a maturity equal to the period of time remaining until the
next readjustment of the guaranteed interest rate.

VARIABLE AMOUNT MASTER DEMAND NOTES. Variable Amount Master Demand Notes are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Although there is no secondary market for these notes, a Fund
may demand payment of principal and accrued interest at any time and may resell
the notes at any time to a third party. The absence of an active secondary
market, however, could make it difficult for a Fund to dispose of a Variable
Amount Master Demand Note if the issuer defaulted on its payment obligations,
and the Fund could, for this or other reasons, suffer a loss to the extent of
the default. While the notes typically are not rated by credit rating agencies,
issuers of Variable Amount Master Demand Notes must satisfy the same criteria as
set forth above for unrated commercial paper, and the Adviser will monitor
continuously the issuer's financial status and ability to make payments due
under the instrument. Where necessary to ensure that a note is of "high
quality," a Fund will require that the issuer's obligation to pay the principal
of the note be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend. For purposes of a Fund's investment policies, a
Variable Amount Master Demand Note will be deemed to have a maturity equal to
the longer of the period of time remaining until the next readjustment of its
interest rate or the period of time remaining until the principal amount can be
recovered from the issuer through demand.

VARIABLE RATE DEMAND NOTES. Variable Rate Demand Notes are tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed seven days. The Funds also may invest in participation Variable Rate
Demand Notes, which provide a Fund with an undivided interest in underlying
Variable Rate Demand Notes held by major investment banking institutions. Any
purchase of Variable Rate Demand Notes will meet applicable diversification and
concentration requirements.

VARIABLE AND FLOATING RATE NOTES. A Variable Rate Note is one whose terms
provide for the readjustment of its interest rate on set dates and which, upon
such readjustment, reasonably can be expected to have a market value that
approximates its par value. A Floating Rate Note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, reasonably can be expected to have a market value that
approximates its par value. Such notes frequently are not rated by credit rating
agencies; however, unrated Variable and Floating Rate Notes purchased by the
Fund will only be those determined by the Adviser, under guidelines established
by the Trustees, to pose minimal credit risks and to be of comparable quality,
at the time of purchase, to rated instruments eligible for purchase under the
Fund's investment policies. In making such determinations, the Adviser will
consider the earning power, cash flow and other liquidity ratios of the issuers
of such notes (such issuers include financial, merchandising, bank holding and
other companies) and will continuously monitor their financial condition.
Although there may be no active secondary market with respect to a particular
Variable or Floating Rate Note purchased by a Fund, the Fund may resell the note
at any time to

<PAGE>

a third party. The absence of an active secondary market, however, could make it
difficult for a Fund to dispose of a Variable or Floating Rate Note in the event
that the issuer of the note defaulted on its payment obligations and a Fund
could, for this or other reasons, suffer a loss to the extent of the default.
Variable or Floating Rate Notes may be secured by bank letters of credit.

Variable or Floating Rate Notes may have maturities of more than one year, as
follows:

1. A Variable or Floating Rate Note that is issued or guaranteed by the United
States government or any agency thereof and which has a variable rate of
interest readjusted no less frequently than annually will be deemed to have a
maturity equal to the period remaining until the next readjustment of the
interest rate.

2. A Variable or Floating Rate Note, the principal amount of which is scheduled
on the face of the instrument to be paid in one year or less, will be deemed by
the Fund to have a maturity equal to the period remaining until the next
readjustment of the interest rate.

3. A Variable or Floating Rate Note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed to have a maturity equal
to the longer of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand.

4. A Variable or Floating Rate Note that is subject to a demand feature will be
deemed to have a maturity equal to the period remaining until the principal
amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where a Fund is entitled
to receive the principal amount of the note either at any time on no more than
30 days' notice or at specified intervals not exceeding one year and upon no
more than 30 days' notice.

EXTENDIBLE DEBT SECURITIES. Extendible Debt Securities are securities that can
be retired at the option of a Fund at various dates prior to maturity. In
calculating average portfolio maturity, a Fund may treat Extendible Debt
Securities as maturing on the next optional retirement date.

RECEIPTS. Receipts are separately traded interest and principal component parts
of bills, notes, and bonds issued by the U.S. Treasury that are transferable
through the Federal book entry system, known as Separately Traded Registered
Interest and Principal Securities ("STRIPS") and Coupon Under Book Entry
Safekeeping ("CUBES"). These instruments are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank; the custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates or
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs"), and
Certificates of Accrual on Treasury Securities ("CATS").

ZERO-COUPON BONDS. Zero-Coupon Bonds are purchased at a discount from the face
amount because the buyer receives only the right to a fixed payment on a certain
date in the future and does not receive any periodic interest payments. The
effect of owning instruments which do not make current interest payments is that
a fixed yield is earned not only on the original investment but also, in effect,
on accretion during the life of the obligations. This implicit reinvestment of
earnings at the same rate eliminates the risk of being unable to reinvest
distributions at a rate as high as the implicit yields on the Zero-Coupon Bond,
but at the same time eliminates the holder's ability to reinvest at higher
rates. For this reason, Zero-Coupon Bonds are subject to substantially greater
price fluctuations during periods of changing market interest rates than are
comparable securities which pay interest currently, which fluctuation increases
in accordance with the length of the period to maturity.

LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Loans and Other Direct Debt Instruments
are interests in amounts owed by a corporate, governmental, or other borrower to
another party. They may represent

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amounts owed to lenders or lending syndicates (loans and loan participations),
to suppliers of goods or services (trade claims or other receivables), or to
other parties. Direct Debt Instruments involve a risk of loss in case of default
or insolvency of the borrower and may offer less legal protection to a Fund in
the event of fraud or misrepresentation. In addition, loan participations
involve a risk of insolvency of the lending bank or other financial
intermediary. Direct Debt Instruments may also include standby financing
commitments that obligate a Fund to supply additional cash to the borrower on
demand.

SECURITIES OF OTHER INVESTMENT COMPANIES. A Fund may invest up to 5% of its
total assets in the securities of any one investment company, but may not own
more than 3% of the securities of any one investment company or invest more than
10% of its total assets in the securities of other investment companies.

U.S. GOVERNMENT OBLIGATIONS. U.S. Government Obligations are obligations issued
or guaranteed by the U.S. Government, its agencies, and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.

WHEN-ISSUED SECURITIES. A Fund may purchase securities on a when-issued basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When a Fund agrees to purchase securities on a when-issued basis, the
custodian will set aside cash or liquid portfolio securities equal to the amount
of the commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that a Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. When a Fund
engages in when-issued transactions, it relies on the seller to consummate the
trade. Failure of the seller to do so may result in the Fund incurring a loss or
missing the opportunity to obtain a price considered to be advantageous. The
Funds do not intend to purchase when issued securities for speculative purposes,
but only in furtherance of its investment objective.

DELAYED-DELIVERY TRANSACTIONS. A Fund may buy and sell securities on a
delayed-delivery basis. These transactions involve a commitment by the Fund to
purchase or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security (and more than seven days in the future). Typically, no
interest accrues to the purchaser until the security is delivered.
The Fund may receive fees for entering into delayed delivery transactions.

When purchasing securities on a delayed-delivery basis, a Fund assumes the
rights and risks of ownership, including the risks of price and yield
fluctuations in addition to the risks associated with the Fund's other
investments. Because a Fund is not required to pay for securities until the
delivery date, these delayed-delivery purchases may result in a form of
leverage. When delayed-delivery purchases are outstanding, the Fund will set
aside cash and appropriate liquid assets in a segregated custodial account to
cover its purchase obligations. When the Fund has sold a security on a
delayed-delivery basis, it does not participate in further gains or losses with
respect to the security. If the other party to a delayed-delivery transaction
fails to deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity or suffer a loss.

The Fund may renegotiate delayed-delivery transactions after they are entered
into or may sell underlying securities before they are delivered, either of
which may result in capital gains or losses.

MORTGAGE-BACKED SECURITIES--IN GENERAL. Mortgage-Backed Securities are backed by
mortgage

<PAGE>

obligations including, among others, conventional 30-year fixed rate mortgage
obligations, graduated payment mortgage obligations, 15-year mortgage
obligations, and adjustable-rate mortgage obligations. All of these mortgage
obligations can be used to create pass-through securities. A pass-through
security is created when mortgage obligations are pooled together and undivided
interests in the pool or pools are sold. The cash flow from the mortgage
obligations is passed through to the holders of the securities in the form of
periodic payments of interest, principal, and prepayments (net of a service
fee).

Prepayments occur when the holder of an individual mortgage obligation prepays
the remaining principal before the mortgage obligation's scheduled maturity
date. As a result of the pass-through of prepayments of principal on the
underlying securities, Mortgage-Backed Securities are often subject to more
rapid prepayment of principal than their stated maturity indicates. In addition,
during periods of falling interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average life of the pool. Conversely, in
periods of rising interest rates, prepayment rates tend to decrease, lengthening
a pool's average life. Because the prepayment characteristics of the underlying
mortgage obligations vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of pass-through certificates.
Prepayment rates are important because of their effect on the yield and price of
the securities.

A Fund may purchase Mortgage-Backed Securities at a premium or at a discount.
Accelerated prepayments have an adverse impact on yields for pass-throughs
purchased at a premium (i.e., a price in excess of principal amount) and may
involve additional risk of loss of principal because the premium may not have
been fully amortized at the time the obligation is repaid. The opposite is true
for pass-throughs purchased at a discount. Among the U.S. Government securities
in which a Fund may invest are Government Mortgage-Backed Securities (or
government guaranteed mortgage-related securities). Such guarantees do not
extend to the value of yield of the Mortgage-Backed Securities themselves or of
the Fund's shares.

U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES. Certain obligations of certain
agencies and instrumentalities of the U.S. Government are Mortgage-Backed
Securities. Some such obligations, such as those issued by GNMA are supported by
the full faith and credit of the U.S. Treasury; others, such as those of FNMA,
are supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the Federal Farm Credit
Banks or FHLMC, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored agencies and instrumentalities if it is not
obligated to do so by law.

The principal governmental (i.e., backed by the full faith and credit of the
U.S. Government) guarantor of Mortgage-Backed Securities is GNMA. GNMA is a
wholly owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks, and mortgage bankers) and pools of FHA-insured
or VA-guaranteed mortgages. Government-related (i.e., not backed by the full
faith and credit of the U.S. Government) guarantors include FNMA and FHLMC. FNMA
and FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass-through securities issued by FNMA and FHLMC are guaranteed as
to timely payment of principal and interest by FNMA and FHLMC, respectively, but
are not backed by the full faith and credit of the U.S. Government.

GNMA CERTIFICATES. Certificates of the GNMA are mortgage-backed securities which
evidence an undivided interest in a pool or pools of mortgages. GNMA
Certificates that a Fund may purchase are the "modified pass-through" type,
which entitle the holder to receive timely payment of all interest and principal
payments due on the mortgage pool, net of fees paid to the "issuer" and GNMA,
regardless of whether or not the mortgagor actually makes the payment.

The National Housing Act authorizes GNMA to guarantee the timely payment of
principal and interest on securities backed by a pool of mortgages insured by
the Federal Housing Administration ("FHA") or

<PAGE>

guaranteed by the Veterans Administration ("VA"). The GNMA guarantee is backed
by the full faith and credit of the U.S. Government. GNMA is also empowered to
borrow without limitation from the U.S. Treasury if necessary to make any
payments required under its guarantee.

The estimated average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures usually will
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that a Fund has
purchased the certificates above par in the secondary market.

FHLMC SECURITIES. The FHLMC was created in 1970 to promote development of a
nationwide secondary market in conventional residential mortgages. The FHLMC
issues two types of mortgage pass-through securities ("FHLMC Certificates"),
mortgage participation certificates, and collateralized mortgage obligations
("CMOs"). Participation Certificates resemble GNMA Certificates in that each
Participation Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. The FHLMC guarantees
timely monthly payment of interest on PCs and the ultimate payment of principal.
Recently introduced FHLMC Gold Participation Certificates guarantee the timely
payment of both principal and interest.

FHLMC CMOs are backed by pools of agency mortgage-backed securities and the
timely payment of principal and interest of each tranche is guaranteed by the
FHLMC. The FHLMC guarantee is not backed by the full faith and credit of the
U.S. Government.

FNMA SECURITIES. The FNMA was established in 1938 to create a secondary market
in mortgages insured by the FHA, but has expanded its activity to the secondary
market for conventional residential mortgages. FNMA primarily issues two types
of mortgage-backed securities, guaranteed mortgage pass-through certificates
("FNMA Certificates") and CMOs. FNMA Certificates resemble GNMA Certificates in
that each FNMA Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. FNMA guarantees timely
payment of interest and principal on FNMA Certificates and CMOs. The FNMA
guarantee is not backed by the full faith and credit of the U.S. Government.

COLLATERALIZED MORTGAGE OBLIGATIONS. Mortgage-Backed Securities in which a Fund
may invest may also include CMOs. CMOs are securities backed by a pool of
mortgages in which the principal and interest cash flows of the pool are
channeled on a prioritized basis into two or more classes, or tranches, of
bonds.

NON-GOVERNMENTAL MORTGAGE-BACKED SECURITIES. A Fund may invest in
mortgage-related securities issued by non-governmental entities. Commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers, and other secondary market issuers also create pass-through
pools of conventional residential mortgage loans. Such issuers also may be the
originators of the underlying mortgage loans as well as the guarantors of the
mortgage-related securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are not direct or indirect government guarantees of payments
in the former pools. However, timely payment of interest and principal of these
pools is supported by various forms of insurance or guarantees, including
individual loan, title, pool, and hazard insurance. The insurance and guarantees
are issued by government entities, private insurers and the mortgage poolers.
Such insurance and guarantees and the creditworthiness of the issuers, thereof
will be considered in determining whether a Non-Governmental Mortgage-Backed
Security meets a Fund's investment quality standards. There can be no assurance
that the private insurers can meet their obligations under the policies. A Fund
may buy Non-Governmental Mortgage-Backed Related Securities without insurance or
guarantees if, through an examination of the loan experience and practices of
the poolers, the Adviser determines that the securities meet the Fund's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. A Fund will not purchase mortgage-related securities or any other
assets which in the opinion of the Adviser are illiquid if,

<PAGE>

as a result, more than 15% of the value of the Fund's net assets will be
invested in illiquid securities.

A Fund may purchase mortgage-related securities with stated maturities in excess
of 10 years. Mortgage-related securities include CMOs and participation
certificates in pools of mortgages. The average life of mortgage-related
securities varies with the maturities of the underlying mortgage instruments,
which have maximum maturities of 40 years. The average life is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities as the result of mortgage prepayments. The rate of such
prepayments, and hence the average life of the certificates, will be a function
of current market interest rates and current conditions in the relevant housing
markets. The impact of prepayment of mortgages is described under "Government
Mortgage-Backed Securities." Estimated average life will be determined by the
Adviser. Various independent mortgage-related securities dealers publish
estimated average life data using proprietary models, and in making such
determinations, the Adviser will rely on such data except to the extent such
data are deemed unreliable by the Adviser. The Adviser might deem data
unreliable which appeared to present a significantly different estimated average
life for a security than data relating to the estimated average life of
comparable securities as provided by other independent mortgage-related
securities dealers.

ASSET-BACKED SECURITIES. Asset-backed securities are debt securities backed by
pools of automobile or other commercial or consumer finance loans. The
collateral backing asset-backed securities cannot be foreclosed upon. These
issues are normally traded over-the-counter and typically have a short to
intermediate maturity structure, depending on the paydown characteristics of the
underlying financial assets which are passed through to the security holder.

REAL ESTATE INVESTMENT TRUSTS. Each Fund may invest in real estate investment
trusts ("REITs"), which are pooled investment vehicles that invest primarily in
income-producing real estate or real estate-related loans or interests. Like
regulated investment companies such as the Trust, a REIT is not taxed on income
distributed to its shareholders if the REIT complies with the applicable
provisions of the Code. By investing in a REIT, a Fund will indirectly bear its
proportionate share of any expenses paid by the REIT in addition to Fund
expenses.

There are three general categories of REITs: equity, mortgage and hybrid REITs.
Equity REITs, which invest the majority of their assets directly in real
property, derive their income primarily from rents and may also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs,
which invest primarily in real estate mortgages, derive their income primarily
from interest payments on those mortgages. Hybrid REITs combine the
characteristics of both equity and mortgage REITs.

A REIT's market price may be affected by changes in the value of the underlying
property that it owns or by the credit quality of borrowers to whom the REIT
lends money. REITs are dependent on property management skills, are not
diversified (except as the Code requires), are heavily dependent on cash flow,
and are subject to borrower default, self-liquidation, failing to qualify for
tax exemption under the Code and/or registration exemption under the 1940 Act.

PREFERRED STOCK. Each Fund may invest in preferred stock issued by domestic and
foreign corporations. Preferred stocks are instruments that combine qualities
both of equity and debt securities. Individual issues of preferred stock will
have those rights and liabilities that are spelled out in the governing
document. Preferred stocks usually pay a fixed dividend per quarter (or annum)
and are senior to common stock in terms of liquidation and dividends rights.
Preferred stocks typically do not have voting rights.

CONVERTIBLE SECURITIES. Each Fund may invest in convertible debt and convertible
preferred stock. These securities may be converted at either a stated price or
rate into underlying shares of common stock. As a result, an investor in
convertible securities may benefit from increases in the underlying common
stock's market price. Convertible securities provide higher yields than the
underlying common stock, but typically offer lower yields than comparable
non-convertible securities. The value of convertible securities fluctuates in
relation to changes in interest rates like bonds and also fluctuates in relation
to the underlying stock's price.

<PAGE>

FUTURES AND OPTIONS

FUTURES CONTRACTS. The Funds may enter into futures contracts, options on
futures contracts, and stock index futures contracts and options thereon for the
purposes of remaining fully invested and reducing transaction costs. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security, class of securities, or an index
at a specified future time and at a specified price. A stock index futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of trading of the
contracts and the price at which the futures contract is originally struck.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission (the "CFTC"), a U.S. Government agency.

The Funds may enter into contracts for the future delivery of securities and
futures contracts based on a specific security, class of securities or an index,
purchase or sell options on any such futures contracts and engage in related
closing transactions. A futures contract on a securities index is an agreement
obligating either party to pay, and entitling the other party to receive, while
the contract is outstanding, cash payments based on the level of a specified
securities index.

Although futures contracts (other than those relating to indexes) by their terms
call for actual delivery and acceptance of the underlying securities, in most
cases the contracts are closed out before the settlement date without the making
or taking of delivery. Closing out an open futures position is done by taking an
opposite position (buying a contract which has previously been "sold," or
"selling" a contract previously purchased) in an identical contract to terminate
the position. The acquisition of put and call options on futures contracts will,
respectively, give a Fund the right (but not the obligation), for a specified
price, to sell or to purchase the underlying futures contract, upon exercise of
the option, at any time during the option period. Brokerage commissions are
incurred when a futures contract is bought or sold.

Futures traders are required to make a good faith margin deposit in cash or
government securities with a futures commission merchant or custodian to
initiate and maintain open positions in futures contracts. A margin deposit is
intended to assure completion of the contract (delivery or acceptance of the
underlying security) if it is not terminated prior to the specified delivery
date. Minimal initial margin requirements are established by the futures
exchange and may be changed. Futures commission merchants may establish deposit
requirements which are higher than the exchange minimums. Initial margin
deposits on futures contracts are customarily set at levels much lower than the
prices at which the underlying securities are purchased and sold, typically
ranging upward from less than 5% of the value of the contract being traded.

After a futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Funds
expect to earn interest income on its margin deposits.

When interest rates are expected to rise or market values of portfolio
securities are expected to fall, a Fund can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, a
Fund, through the purchase of such contracts, can attempt to secure better rates
or prices for a Fund than might later be available in the market when it effects
anticipated purchases.

The Funds may sell futures contracts to protect securities it owns against price
declines or purchase contracts to protect against an increase in the price of
securities it intends to purchase. A Fund may also enter into such transactions
in order to terminate existing positions.

<PAGE>

The Funds' ability to use futures trading effectively depends on several
factors. First, it is possible that there will not be a perfect price
correlation between a futures contract and its underlying stock index. Second,
it is possible that a lack of liquidity for futures contracts could exist in the
secondary market, resulting in an inability to close a futures position prior to
its maturity date. Third, the purchase of a futures contract involves the risk
that a Fund could lose more than the original margin deposit required to
initiate a futures transaction.

Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move in an unanticipated
manner. Such unanticipated changes may also result in poorer overall performance
than if a Fund had not entered into any futures transactions. In addition, the
value of a Fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities, limiting a Fund's ability
to hedge effectively against interest rate and/or market risk and giving rise to
additional risks. There is no assurance of liquidity in the secondary market for
purposes of closing out futures positions.

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. The Funds will not enter into
futures contract transactions for purposes other than bona fide hedging purposes
or as a substitute for the underlying securities to gain market exposure to the
extent that, immediately thereafter, the sum of its initial margin deposits on
open contracts exceeds 5% of the market value of a Fund's total assets. In
addition, a Fund will not enter into futures contracts to the extent that the
value of the futures contracts held would exceed 1/3 of the Fund's total assets.
The Trust need not register with the CFTC as a Commodities Pool Operator.

In addition to the margin restrictions discussed above, transactions in futures
contracts may involve the segregation of funds pursuant to requirements imposed
by the SEC. Under those requirements, where a Fund has a long position in a
futures contract, it may be required to establish a segregated account (not with
a futures commission merchant or broker) containing cash or certain liquid
assets equal to the purchase price of the contract (less any margin on deposit).
For a short position in futures or forward contracts held by the Fund, those
requirements may mandate the establishment of a segregated account (not with a
futures commission merchant or broker) with cash or certain liquid assets that,
when added to the amounts deposited as margin, equal the market value of the
instruments underlying the futures contracts (but are not less than the price at
which the short positions were established). However, segregation of assets is
not required if a Fund "covers" a long position. For example, instead of
segregating assets, a Fund, when holding a long position in a futures contract,
could purchase a put option on the same futures contract with a strike price as
high or higher than the price of the contract held by a Fund. In addition, where
a Fund takes short positions, or engages in sales of call options, it need not
segregate assets if it "covers" these positions. For example, where a Fund holds
a short position in a futures contract, it may cover by owning the instruments
underlying the contract. A Fund may also cover such a position by holding a call
option permitting it to purchase the same futures contract at a price no higher
than the price at which the short position was established. Where a Fund sells a
call option on a futures contract, it may cover either by entering into a long
position in the same contract at a price no higher than the strike price of the
call option or by owning the instruments underlying the futures contract. A Fund
could also cover this position by holding a separate call option permitting it
to purchase the same futures contract at a price no higher than the strike price
of the call option sold by a Fund.

In addition, the extent to which a Fund may enter into transactions involving
futures contracts may be limited by the Code's requirements for qualification as
a registered investment company and a Fund's intention to qualify as such.

RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain the required margin. In such situations, if a Fund has

<PAGE>

insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In addition, a
Fund may be required to make delivery of the instruments underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to effectively hedge them. A Fund
will minimize the risk that they will be unable to close out a futures contract
by only entering into futures contracts which are traded on national futures
exchanges and for which there appears to be a liquid secondary market.

The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. Because the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities market, there may be increased participation by speculators in
the futures market which may also cause temporary price distortions. A
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchaser or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures strategies engaged in by the Funds are only for hedging purposes, the
Adviser does not believe that the Funds are subject to the risks of loss
frequently associated with futures transactions. The Funds would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline.

Use of futures transactions by the Funds involve the risk of imperfect or no
correlation where the securities underlying futures contract have different
maturities than the portfolio securities being hedged. It is also possible that
the Funds could both lose money on futures contracts and also experience a
decline in the value of its portfolio securities. There is also the risk of loss
by the Funds of margin deposits in the event of bankruptcy of a broker with whom
the Funds have open positions in a futures contract or related option.

OPTIONS. The Funds may sell (write) call options which are traded on national
securities exchanges with respect to common stock in its portfolio. A Fund must
at all times have in its portfolio the securities which it may be obligated to
deliver if the option is exercised. The risk of writing uncovered call options
is that the writer of the option may be forced to acquire the underlying
security at a price in excess of the exercise price of the option, that is, the
price at which the writer has agreed to sell the underlying security to the
purchaser of the option. A Fund may write call options in an attempt to realize
a greater level of current income than would be realized on the securities
alone. A Fund may also write call options as a partial hedge against a possible
stock market decline. In view of their investment objective, a Fund generally
would write call options only in circumstances where the Adviser does not
anticipate significant appreciation of the underlying security in the near
future or has otherwise determined to dispose of the security. As the writer of
a call option, a Fund receives a premium for undertaking the obligation to sell
the underlying security at a fixed price during the option period, if the option
is exercised. So long as a Fund remains obligated as a writer of a call option,
it forgoes the opportunity to profit from increases in the market price of the
underlying security above the exercise price of the option, except insofar as
the premium represents such a profit. A Fund retains the risk of loss should the
value of the underlying security decline. A Fund may also enter into "closing
purchase transactions" in order to terminate its obligation as a writer of a
call option prior to the expiration of the option. Although the writing of call
options only on national securities exchanges increases the likelihood of a
Fund's ability to make closing purchase transactions, there is no assurance that
a Fund will be able to effect such transactions at any particular time or at any
acceptable price. The writing of call options could result in increases in a
Fund's portfolio turnover rate, especially during periods when market prices of
the underlying securities appreciate.

PUTS. A put is a right to sell a specified security (or securities) within a
specified period of time at a specified exercise price. A Fund may sell,
transfer, or assign a put only in conjunction with the sale,

<PAGE>

transfer, or assignment of the underlying security or securities. The amount
payable to a Fund upon its exercise of a "put" is normally (i) a Fund's
acquisition cost of the securities (excluding any accrued interest which a Fund
paid on the acquisition), less any amortized market premium or plus any
amortized market or original issue discount during the period a Fund owned the
securities, plus (ii) all interest accrued on the securities since the last
interest payment date during that period.

Puts may be acquired by a Fund to facilitate the liquidity of its portfolio
assets. Puts may also be used to facilitate the reinvestment of a Fund's assets
at a rate of return more favorable than that of the underlying security. Puts
may, under certain circumstances, also be used to shorten the maturity of
underlying variable rate or floating rate securities for purposes of calculating
the remaining maturity of those securities and the dollar-weighted average
portfolio maturity of a Fund's assets. See "Variable and Floating Rate Notes"
and "Valuation" in this SAI.

A Fund generally will acquire puts only where the puts are available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, a Fund may pay for puts either separately in cash or by paying a
higher price for portfolio securities which are acquired subject to the puts
(thus reducing the yield to maturity otherwise available for the same
securities). The Funds intends to enter into puts only with dealers, banks, and
broker-dealers which, in the Adviser's opinion, present minimal credit risks.

Each Fund may write put options from time to time. Such options may be listed on
a national securities exchange and issued by the Options Clearing Corporation or
traded over-the-counter. A Fund may seek to terminate its position in a put
option it writes before exercise by closing out the option in the secondary
market at its current price. If the secondary market is not liquid for a put
option a Fund has written, however, the Fund must continue to be prepared to pay
the strike price while the option is outstanding, regardless of price changes,
and must continue to set aside assets to cover its position. Upon the exercise
of an option, the Fund is not entitled to the gains, if any, on securities
underlying the options. Each Fund also may purchase index put and call options
and write index options. Through the writing or purchase of index options, the
Fund can achieve many of the same objectives as through the use of options on
individual securities. Utilizing options is a specialized investment technique
that entails a substantial risk of a complete loss of the amounts paid as
premiums to writers of options.

ILLIQUID INVESTMENTS. Illiquid investments are investments that cannot be sold
or disposed of, within seven business days, in the ordinary course of business
at approximately the prices at which they are valued.

Under the supervision of the Trust's Board of Trustees (the "Board"), the
Adviser determines the liquidity of the Funds' investments and, through reports
from the Adviser, the Trustees monitor investments in illiquid instruments. In
determining the liquidity of a Fund's investments, the Adviser may consider
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Funds' rights and obligations
relating to the investment).

Investments currently considered by a Fund to be illiquid include repurchase
agreements not entitling the holder to payment of principal and interest within
seven days, over the counter options, non-government stripped fixed-rate
mortgage-backed securities, and Restricted Securities.

Also, the Adviser may determine some securities to be illiquid.

However, with respect to over-the-counter options a Fund writes, all or a
portion of the value of the underlying instrument may be illiquid depending on
the assets held to cover the option and the nature and terms of any agreement a
Fund may have to close out the option before expiration.

<PAGE>

In the absence of market quotations, illiquid investments are priced at fair
value as determined in good faith by a committee appointed by the Trustees.

If through a change in values, net assets, or other circumstances, more than 15%
of a Fund's net assets were invested in illiquid securities, the Fund would seek
to take appropriate steps to protect liquidity.

RESTRICTED SECURITIES. Restricted securities generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
Securities Act, or in a registered public offering.

Where registration is required, a Fund may be obligated to pay all or part of
the registration expense and a considerable period may elapse between the time
it decides to seek registration and the time the Fund may be permitted to sell a
security under an effective registration statement.

If, during such a period, adverse market conditions were to develop, a Fund
might obtain a less favorable price than prevailed when it decided to seek
registration of the shares.

SECURITIES LENDING TRANSACTIONS. The Funds may from time to time lend securities
from their portfolio to broker-dealers, banks, financial institutions and
institutional borrowers of securities and receive collateral in the form of cash
or U.S. Government Obligations. Generally, a Fund must receive initial
collateral equal to 102% of the market value of the loaned securities, plus any
interest due in the form of cash or U.S. Government Obligations. The Funds will
not lend portfolio securities to: (a) any "affiliated person" (as that term is
defined in the 1940 Act)) of any Fund; (b) any affiliated person of the
Investment Adviser; or (c) any affiliated person of such an affiliated person.
This collateral must be valued daily and should the market value of the loaned
securities increase, the borrower must furnish additional collateral to a Fund
sufficient to maintain the value of the collateral equal to at least 100% of the
value of the loaned securities. During the time portfolio securities are on
loan, the borrower will pay the Fund any dividends or interest paid on such
securities plus any interest negotiated between the parties to the lending
agreement. Loans will be subject to termination by the Funds or the borrower at
any time. While a Fund will not have the right to vote securities on loan, they
intend to terminate loans and regain the right to vote if that is considered
important with respect to the investment. A Fund will only enter into loan
arrangements with broker-dealers, banks or other institutions which the Adviser
has determined are creditworthy under guidelines established by the Trustees.
The Funds will limit their securities lending to 33 1/3% of total assets.

SHORT SALES AGAINST-THE-BOX. The Funds will not make short sales of securities,
other than short sales "against-the-box." In a short sale against-the-box, a
Fund sells a security that it owns, or a security equivalent in kind and amount
to the security sold short that the Fund has the right to obtain, for delivery
at a specified date in the future. A Fund will enter into short sales
against-the-box to hedge against unanticipated declines in the market price of
portfolio securities. If the value of the securities sold short increases prior
to the scheduled delivery date, a Fund loses the opportunity to participate in
the gain.

INVESTMENT GRADE AND HIGH QUALITY SECURITIES. The Funds may invest in
"investment grade" obligations, which are those rated at the time of purchase
within the four highest rating categories assigned by an NRSRO or, if unrated,
are obligations that the Adviser determines to be of comparable quality. The
applicable securities ratings are described in the Appendix. "High-quality"
short-term obligations are those obligations which, at the time of purchase, (1)
possess a rating in one of the two highest ratings categories from at least one
NRSRO (for example, commercial paper rated "A-1" or "A-2" by Standard & Poor's
("S&P") or "P-1" or "P-2" by Moody's Investors Service, Inc. ("Moody's")) or (2)
are unrated by an NRSRO but are determined by the Adviser to present minimal
credit risks and to be of comparable quality to rated instruments eligible for
purchase by the Funds under guidelines adopted by the Board.

PARTICIPATION INTERESTS. The Funds may purchase interests in securities from
financial institutions such as commercial and investment banks, savings and loan
associations and insurance companies. These interests may take the form of
participation, beneficial interests in a trust, partnership interests or any
other form of

<PAGE>

indirect ownership. The Funds invest in these participation interests, in order
to obtain credit enhancement or demand features that would not be available
through direct ownership of the underlying securities.

WARRANTS. Warrants are securities that give a Fund the right to purchase equity
securities from the issuer at a specified price (the strike price) for a limited
period of time, which strike price is usually higher than the current market
price at the time of issuance. Because the market price of warrants typically is
much lower than the current market price of the underlying securities, they are
subject to greater price fluctuations. As a result, warrants may be more
volatile investments than the underlying securities and may offer greater
potential for capital appreciation as well as capital loss.

FOREIGN INVESTMENTS. A Fund may invest in securities issued by foreign branches
of U.S. banks, foreign banks, or other foreign issuers, including sponsored and
unsponsored American Depositary Receipts ("ADRs") and securities purchased on
foreign securities exchanges. Such investment may subject the Fund to
significant investment risks that are different from, and additional to, those
related to investments in obligations of U.S. domestic issuers or in U.S.
securities markets. Unsponsored ADRs may involve additional risks.

The value of securities denominated in or indexed to foreign currencies, and of
dividends and interest 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
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial condition and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions, and custodial costs, are generally higher than for U.S.
investments.

Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.

Investing abroad also involves different political and economic risks. Foreign
investments may be affected by actions of foreign governments adverse to the
interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. 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. There is no assurance that the Adviser will be able to
anticipate these potential events or counter their effects.

The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.

A Fund may invest in foreign securities that impose restrictions on transfer
within the U.S. or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.

Preferred stocks are instruments that combine qualities both of equity and debt
securities. Individual issues of preferred stock will have those rights and
liabilities that are spelled out in the governing document. Preferred stocks
usually pay a fixed dividend per quarter (or annum) and are senior to common
stock in terms of liquidation and dividends rights, and preferred stocks
typically do not have voting rights.

<PAGE>

VALUATION OF PORTFOLIO SECURITIES FOR THE INVESTMENT QUALITY BOND FUND

Investment securities held by the Investment Quality Bond Fund are valued on the
basis of security valuations provided by an independent pricing service,
approved by the Trustees, which determines value by using information with
respect to transactions of a security, quotations from dealers, market
transactions in comparable securities, and various relationships between
securities. Specific investment securities which are not priced by the approved
pricing service will be valued according to quotations obtained from dealers who
are market makers in those securities. Investment securities with less than 60
days to maturity when purchased are valued at amortized cost which approximates
market value. Investment securities not having readily available market
quotations will be priced at fair value using a methodology approved in good
faith by the Board.

VALUATION OF PORTFOLIO SECURITIES FOR THE EQUITY FUNDS.

Each equity security held by an Equity Fund is valued at its last sales price on
the exchange where the security is principally traded or, lacking any sales on a
particular day, the security is valued at the last available bid quotation on
that day. Exchange listed convertible debt securities are valued at the bid
obtained from broker-dealers or a comparable alternative, such as Bloomberg or
Telerate, based upon pricing procedures approved by the Board. Each security
traded in the over-the-counter market (but not including securities reported on
the Nasdaq National Market System) is valued at the bid based upon quotes
furnished by market makers for such securities. Each security reported on the
Nasdaq National Market System is valued at the sales price on the valuation date
or absent a last sales price, at the fair market value on that day, as
established by an independent pricing service. Non-convertible debt securities
are valued on the basis of prices provided by an independent pricing service.
Prices provided by the pricing service may be determined without exclusive
reliance on quoted prices, and may reflect appropriate factors such as
institution-size trading in similar groups of securities, developments related
to special securities, yield, quality, coupon rate, maturity, type of issue,
individual trading characteristics and other market data. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the supervision of the Trust's officers in
a manner specifically authorized by the Boards. Short-term obligations having 60
days or less to maturity are valued on the basis of amortized cost. For purposes
of determining net asset value per share, futures and options contracts
generally will be valued 15 minutes after the close of trading of the New York
Stock Exchange, Inc. (the "NYSE").

Generally, trading in foreign securities, corporate bonds, U.S. Government
securities and money market instruments is substantially completed each day at
various times prior to the close of the NYSE. The values of such securities used
in computing the net asset value of each Fund's shares are determined at such
times. Foreign currency exchange rates are also generally determined prior to
the close of the NYSE. Occasionally, events affecting the values of such
securities and such exchange rates may occur between the times at which such
values are determined and the close of the NYSE which will not be reflected in
the computation of a Fund's net asset value. If events materially affecting the
value of such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith by or under the
supervision of the Board.

PERFORMANCE

From time to time, the "standardized yield," "distribution return," "dividend
yield," "average annual total return," "total return," and "total return at net
asset value" of an investment in each class of Fund shares may be advertised. An
explanation of how yields and total returns are calculated for each class and
the components of those calculations are set forth below.

Yield and total return information may be useful to investors in reviewing a
Fund's performance. A Fund's advertisement of its performance must, under
applicable SEC rules, include the average annual total returns for each class of
shares of a Fund for the 1, 5, and 10-year period (or the life of the class, if
less) as

<PAGE>

of the most recently ended calendar quarter. This enables an investor to compare
the Fund's performance to the performance of other funds for the same periods.
However, a number of factors should be considered before using such information
as a basis for comparison with other investments. Investments in a Fund are not
insured; their yield and total return are not guaranteed and normally will
fluctuate on a daily basis. When redeemed, an investor's shares may be worth
more or less than their original cost. Yield and total return for any given past
period are not a prediction or representation by the Trust of future yields or
rates of return on its shares. The yield and total returns of the Class A and
Class B shares of the Funds are affected by portfolio quality, portfolio
maturity, the type of investments the Fund holds, and operating expenses. Class
B Shares are subject to an asset based service fee of 0.25% of average daily net
assets per year and other class-specific expenses.

STANDARDIZED YIELD. The "yield" (referred to as "standardized yield") of the
Funds for a given 30-day period for a class of shares is calculated using the
following formula set forth in rules adopted by the SEC that apply to all funds
that quote yields:

Standardized Yield = 2 [(a-b + 1)6 - 1]
---
cd

The symbols above represent the following factors:

a = dividends and interest earned during the 30-day period.

b = expenses accrued for the period (net of any expense
reimbursements).

c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive
dividends.
d = the maximum offering price per share of the class on the last
day of the period, adjusted for undistributed net
investment income.

The standardized yield of a class of shares for a 30-day period may differ from
its yield for any other period. The SEC formula assumes that the standardized
yield for a 30-day period occurs at a constant rate for a six-month period and
is annualized at the end of the six-month period. This standardized yield is not
based on actual distributions paid by a Fund to shareholders in the 30-day
period, but is a hypothetical yield based upon the net investment income from a
Fund's portfolio investments calculated for that period. The standardized yield
may differ from the "dividend yield" of that class, described below.
Additionally, because each class of shares of a Fund is subject to different
expenses, it is likely that the standardized yields of the share classes of the
Funds will differ.

DIVIDEND YIELD AND DISTRIBUTION RETURNS. From time to time a Fund may quote a
"dividend yield" or a "distribution return" for each class. Dividend yield is
based on the Class A or Class B share dividends derived from net investment
income during a one-year period. Distribution return includes dividends derived
from net investment income and from net realized capital gains declared during a
one-year period. The "dividend yield" is calculated as follows:

Dividend Yield Dividends of the Class for a Period of One-Year
of the Class = ----------------------------------------------
Max. Offering Price of the Class (last day of period)

TOTAL RETURN CALCULATIONS. Total returns quoted in advertising reflect all
aspects of a Fund's return, including the effect of reinvesting dividends and
net capital gain distributions (if any), and any change in the net asset value
per share of a Fund over the period. Average annual total returns are calculated
by determining the growth or decline in value of a hypothetical historical
investment in a Fund over a stated period, and then calculating the annually
compounded percentage rate that would have produced the same result if the rate
of growth or decline in value had been constant over the period. For example, a
cumulative total return of 100% over ten years would produce an average annual
total return of 7.18%, which is the steady annual rate of return that would
equal 100% growth on an annually compounded basis in ten years. While average
annual total returns (or "annualized total return") are a convenient means of

<PAGE>

comparing investment alternatives, investors should realize that performance for
a Fund is not constant over time, but changes from year to year, and that
average annual total returns represent averaged figures as opposed to the actual
year-to-year performance of a Fund. When using total return and yield to compare
a Fund with other mutual funds, investors should take into consideration
permitted portfolio composition methods used to value portfolio securities and
computing offering price.

TOTAL RETURNS. The "average annual total return" of a Fund, or of each class of
a Fund, is an average annual compounded rate of return for each year in a
specified number of years. It is the rate of return based on the change in value
of a hypothetical initial investment of $1,000 ("P" in the formula below) held
for a number of years ("n") to achieve an Ending Redeemable Value ("ERV"),
according to the following formula:

( ERV )1n - 1 = Average Annual Total Return
-----
( P )

The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:

ERV - P = Total Return
-------
P

Total returns also assume that all dividends and net capital gains distributions
during the period are reinvested to buy additional shares at net asset value per
share, and that the investment is redeemed at the end of the period.

From time to time the Funds also may quote an "average annual total return at
net asset value" or a cumulative "total return at net asset value." It is based
on the difference in net asset value per share at the beginning and the end of
the period for a hypothetical investment in that class of shares and takes into
consideration the reinvestment of dividends and capital gains distributions.

OTHER PERFORMANCE COMPARISONS.

From time to time a Fund may publish the ranking of its performance or the
performance of its Class A or Class B shares by Lipper Analytical Services, Inc.
("Lipper"), a widely-recognized independent mutual fund monitoring service.
Lipper monitors the performance of regulated investment companies, including the
Funds, and ranks the performance of the Funds and their classes against all
other funds in similar categories, for both equity and fixed income funds. The
Lipper performance rankings are based on total return that includes the
reinvestment of capital gains distributions and income dividends but does not
take sales charges or taxes into consideration.

From time to time a Fund may publish the ranking of its performance or
performance of its Class A or Class B shares by Morningstar, Inc., an
independent mutual fund monitoring service that ranks mutual funds, including
the Funds, in broad investment categories (domestic equity, international equity
taxable bond, municipal bond or other) monthly, based upon each fund's three,
five, and ten-year average annual total returns (when available) and a risk
adjustment factor that reflects fund performance relative to three-month U.S.
Treasury bill monthly returns. Such returns are adjusted for fees and sales
loads. There are five ranking categories with a corresponding number of stars:
highest (5), above average (4), neutral (3), below average (2), and lowest (1).
Ten percent of the funds, series or classes in an investment category receive
five stars, 22.5% receive four stars, 35% receive three stars, 22.5% receive two
stars, and the bottom 10% receive one star.

The total return on an investment made in a Fund or in Class A or Class B shares
of a Fund may be compared with the performance for the same period of one or
more of the following indices: the Consumer

<PAGE>

Price Index, the Standard & Poor's 500 Index (the "S&P 500"), the Standard &
Poor's SmallCap Index, and the Lehman Aggregate Bond Index. Other indices may be
used from time to time. The Consumer Price Index generally is considered to be a
measure of inflation. The Lehman Aggregate Bond Index measures the performance
of U.S. corporate bond issues, U.S. government securities and mortgage-backed
securities. The S&P 500 is a composite index of 500 common stocks generally
regarded as an index of U.S. stock market performance. The foregoing bond
indices are unmanaged indices of securities that do not reflect reinvestment of
capital gains or take investment costs into consideration, as these items are
not applicable to indices.

From time to time, the yields and the total returns of the Funds or Class A or
Class B shares of a Fund may be quoted in and compared to other mutual funds
with similar investment objectives in advertisements, shareholder reports or
other communications to shareholders. A Fund also may include calculations in
such communications that describe hypothetical investment results. (Such
performance examples are based on an express set of assumptions and are not
indicative of the performance of any Fund.) Such calculations may from time to
time include discussions or illustrations of the effects of compounding in
advertisements. "Compounding" refers to the fact that, if dividends or other
distributions on a Fund's investment are reinvested by being paid in additional
Fund shares, any future income or capital appreciation of a Fund would increase
the value, not only of the original Fund investment, but also of the additional
Fund shares received through reinvestment. As a result, the value of a Fund
investment would increase more quickly than if dividends or other distributions
had been paid in cash. A Fund may also include discussions or illustrations of
the potential investment goals of a prospective investor (including but not
limited to tax and/or retirement planning), investment management techniques,
policies or investment suitability of a Fund, economic conditions, legislative
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Fund, as well as the views of the investment adviser as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Fund.) A Fund may also include in advertisements, charts, graphs
or drawings which illustrate the potential risks and rewards of investment in
various investment vehicles, including but not limited to stock, bonds, and
Treasury bills, as compared to an investment in shares of a Fund, as well as
charts or graphs which illustrate strategies such as dollar cost averaging, and
comparisons of hypothetical yields of investment in tax-exempt versus taxable
investments. In addition, advertisements or shareholder communications may
include a discussion of certain attributes or benefits to be derived by an
investment in a Fund. Such advertisements or communications may include symbols,
headlines or other material which highlight or summarize the information
discussed in more detail therein. With proper authorization, a Fund may reprint
articles (or excerpts) written regarding a Fund and provide them to prospective
shareholders. Performance information with respect to the Funds is generally
available by calling 1-800-539-FUND.

Investors may also judge, and a Fund may at times advertise, the performance of
a Fund or of Class A or Class B shares of a Fund by comparing it to the
performance of other mutual funds or mutual fund portfolios with comparable
investment objectives and policies, which performance may be contained in
various unmanaged mutual fund or market indices or rankings such as those
prepared by Dow Jones & Co., Inc., S&P, and Lehman Brothers, and in publications
issued by Lipper Analytical Services, Inc. and in the following publications:
IBC's Money Fund Reports, Value Line Mutual Fund Survey, Morningstar,
CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street Journal, The
New York Times, Business Week, American Banker, Fortune, Institutional Investor,
Ibbotson Associates, and U.S.A. Today. In addition to yield information, general
information about a Fund that appears in a publication such as those mentioned
above may also be quoted or reproduced in advertisements or in reports to
shareholders.

Since the Funds will have essentially the same portfolio management team,
investment objective, policies and restrictions as other accounts or funds
managed by KAM, the Prospectuses contain the performance records of these
accounts and funds. (See "Performance" in the Prospectuses.) KAM has prepared
and

<PAGE>

presented this performance information in the Prospectuses in compliance with
the Performance Presentation Standards of the Association for Investment
Management and Research (AIMR-PPS(TM)). AIMR has not been involved with the
preparation or review of this report. The Funds' composites included all
discretionary, fee-paying accounts with assets greater than or equal to $2
million for balanced accounts, $1 million for single asset accounts, $10 million
for fixed income accounts (increased from $1 million as of January 1, 1996), $20
million for structured cash accounts, and $1 million for individual investment
segments other than fixed income accounts. Accounts with assets below these
thresholds are too small to be representative. All accounts are U.S. currency
based.

Advertisements and sales literature may include discussions of specifics of a
portfolio manager's investment strategy and process, including, but not limited
to, descriptions of security selection and analysis. Advertisements may also
include descriptive information about the investment adviser, including, but not
limited to, its status within the industry, other services and products it makes
available, total assets under management, and its investment philosophy.

When comparing yield, total return, and investment risk of an investment in
shares of a Fund with other investments, investors should understand that
certain other investments have different risk characteristics than an investment
in shares of a Fund. For example, certificates of deposit may have fixed rates
of return and may be insured as to principal and interest by the FDIC, while a
Fund's returns will fluctuate and its share values and returns are not
guaranteed. Money market accounts offered by banks also may be insured by the
FDIC and may offer stability of principal. U.S. Treasury securities are
guaranteed as to principal and interest by the full faith and credit of the U.S.
Government.

ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION

The NYSE is scheduled to be closed for the following holidays: New Year's Day,
Dr. Martin Luther King, Jr., Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. This holiday closing
schedule is subject to change.

When the NYSE or the Federal Reserve Board of Cleveland is closed, or when
trading is restricted for any reason other than its customary weekend or holiday
closings, or under emergency circumstances as determined by the SEC to warrant
such action, the Funds will determine their net asset value at Valuation Time. A
Fund's net asset value may be affected to the extent that its securities are
traded on days that are not Business Days.

The Trust has elected, pursuant to Rule 18f-1 under the 1940 Act, to redeem
shares of each Fund solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund during any 90-day period for any one shareholder. The
remaining portion of the redemption may be made in securities or other property,
valued for this purpose as they are valued in computing the net asset value of
each class of the Fund. Shareholders receiving securities or other property on
redemption may realize a gain or loss for tax purposes and may incur additional
costs as well as the associated inconveniences of holding and/or disposing of
such securities or other property.

Pursuant to Rule 11a-3 under the 1940 Act, the Funds are required to give
shareholders at least 60 days' notice prior to terminating or modifying a Fund's
exchange privilege. The 60-day notification requirement may, however, be waived
if (1) the only effect of a modification would be to reduce or eliminate an
administrative fee, redemption fee, or deferred sales charge ordinarily payable
at the time of exchange or (2) a Fund temporarily suspends the offering of
shares as permitted under the 1940 Act or by the SEC or because it is unable to
invest amounts effectively in accordance with its investment objective and
policies.

The Funds reserve the right at any time without prior notice to shareholders to
refuse exchange purchases by any person or group if, in the Adviser's judgment,
a Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.

<PAGE>

PURCHASING AND REDEEMING SHARES.

As described in the Prospectuses, shares of the Funds may be purchased and
redeemed solely through variable contracts and variable life insurance policies
offered by separate accounts of participating insurance companies. The separate
accounts purchase and redeem shares of a Fund based on, among other things, the
amount of premium payments to be effected on that day pursuant to variable
contracts and variable life insurance policies but only on days when the NYSE is
open for trading. Such purchases and redemptions of Fund shares are effected at
its net asset value per share determined as of the close of regular trading on
the NYSE (normally 4:00 p.m. Eastern time) on that same day. Payment for
redemptions will be made by the participating insurance company on behalf of the
Trust and the applicable Fund within seven days. No fee is charged the separate
accounts of the participating insurance companies when they redeem Fund shares.

The Trust may suspend the right of redemption of Fund shares any may postpone
payment for any period: (i) during which the NYSE is closed other than customary
weekend and holiday closings or during which trading on the NYSE is restricted;
(ii) when the SEC determines that a state of emergency exists which may make
payment or transfer not reasonably practicable, (iii) as the SEC may by order
permit for the protection of a Fund's shareholders; or (iv) at any other time
when the Trust may, under applicable laws and regulations, suspend payment of
redemption proceeds.

Should any conflict arise between variable contract and variable life insurance
policy holders that would require the withdrawal of a substantial amount of Fund
assets, orderly portfolio management could be disrupted to the detriment of such
contract and policy holders.

The two classes of shares each represent an interest in the same portfolio
investments of a Fund. However, each class has different shareholder privileges
and features. The net income attributable to Class B shares and the dividends
payable on Class B shares will be reduced by incremental expenses borne solely
by that class, including the service fees to which Class B shares are subject.

EXCHANGING SHARES.

Shares of a Fund may be exchanged for the same class of shares of any other fund
of the Trust. For example, an investor can exchange Class B shares of a Fund
only for Class B shares of another Fund.

DIVIDENDS AND DISTRIBUTIONS

The Funds distribute substantially all of their net investment income and net
capital gains, if any, to shareholders within each calendar year as well as on a
fiscal year basis to the extent required for the Funds to qualify for favorable
federal tax treatment. Each Fund ordinarily declares and pays dividends
quarterly. If a Fund makes a capital gains distribution, it is declared and paid
annually. The amount of a class's distributions may vary from time to time
depending on market conditions, the composition of a Fund's portfolio, and
expenses borne by a Fund or borne separately by a class, as described in
"Alternative Sales Arrangements - Class A and Class B," above. Dividends are
calculated in the same manner, at the same time and on the same day for shares
of each class. However, Class B dividends will differ in amount as a consequence
of any difference in net asset value between Class A and Class B shares.

For this purpose, the net income of a Fund, from the time of the immediately
preceding determination thereof, shall consist of all interest income accrued on
the portfolio assets of the Fund, dividend income, if any, income from
securities loans, if any, and realized capital gains and losses on the Fund's
assets, less all expenses and liabilities of the Fund chargeable against income.
Interest income shall include discount

25
<PAGE>

earned, including both original issue and market discount, on discount paper
accrued ratably to the date of maturity. Expenses, including the compensation
payable to the Adviser, are accrued each day. The expenses and liabilities of a
Fund shall include those appropriately allocable to the Fund as well as a share
of the general expenses and liabilities of the Trust in proportion to the Fund's
share of the total net assets of the Trust.

TAXES

The following is only a summary of certain additional federal income tax
considerations that are not described in the Prospectuses and generally affect
each Fund and its shareholders. No attempt is made to present a detailed
explanation of the tax treatment of each Fund or its shareholders, and the
discussions here and in the Prospectuses are not intended as substitutes for
careful tax planning.

Each Fund intends to qualify as a regulated investment company ("RIC") under the
Code. If so qualified, a Fund will not be subject to federal income tax on its
investment company taxable income and net capital gains to the extent that such
investment company taxable income and net capital gains are distributed in each
taxable year to the variable annuity or variable life insurance contracts
("Contracts") of participating insurance companies that hold its shares. In
addition, if a Fund distributes annually to the Contracts its ordinary income
and capital gain net income, in the manner prescribed in the Code, it will also
not be subject to the 4% federal excise tax otherwise applicable to a RIC on any
of its undistributed income or gains. Distributions of net investment income and
net short-term capital gains will be treated as ordinary income and
distributions of net long-term capital gains will be treated as long-term
capital gain in the hands of the insurance companies. Under current tax law,
capital gains or dividends from any Fund are not currently taxable to a holder
of a Contract when left to accumulate within such Contract.

Section 817(h) of the Code requires that investments of a segregated asset
account of an insurance company be "adequately diversified," in accordance with
Treasury Regulations promulgated thereunder, in order for the holders of the
variable annuity contracts or variable life insurance policies based on such
account to receive the tax-deferred or tax-free treatment generally afforded
holders of annuities or life insurance policies under the Code. The Department
of the Treasury has issued Regulations under section 817(h) which, among other
things, provide the manner in which a segregated asset account will treat
investments in a RIC for purposes of the applicable diversification
requirements. Under the Regulations, if a RIC satisfies certain conditions, the
RIC will not be treated as a single investment of the account for these
purposes, but rather the segregated asset account will be treated as owning its
proportionate share of each of the assets of the RIC. Each Fund plans to satisfy
these conditions at all times so that each Contract of a participating insurance
company investing in the Funds will be treated as adequately diversified under
the Code and Regulations.

For information concerning the federal income tax consequences to the holders of
Contracts, such holders should consult the prospectuses for their particular
Contract.

TRUSTEES AND OFFICERS

BOARD OF TRUSTEES.

Overall responsibility for management of the Trust rests with the Trustees, who
are elected by the shareholders of the Trust. The Trust is managed by the
Trustees in accordance with the laws of the State of Delaware. There are
currently eight Trustees, six of whom are not "interested persons" of the Trust
within the meaning of that term under the 1940 Act ("Independent Trustees"). The
Trustees, in turn, elect the officers of the Trust to supervise actively its
day-to-day operations.

26
<PAGE>

The Trustees of the Trust, their addresses, ages, and their principal
occupations during the past five years are as follows:
<TABLE>

<S> <C> <C>
Position(s)
Name, Address and Age Held With theTrust Principal Occupation During Past 5 Years
- --------------------- ------------------ ----------------------------------------

Roger Noall,*63 Chairman and Since 1996, Executive of KeyCorp; from 1995 to 1996, General
c/o Brighton Apt. 1603 Trustee Counsel and Secretary of KeyCorp; from 1994 to 1996, Senior
8231 Bay Colony Drive Executive Vice President and Administrative Officer of
Chief Naples, FL 34108 KeyCorp; from 1985 to 1994, Vice Chairman of the Board and
Chief Administrative Officer of Society Corporation (now
known as KeyCorp).

Leigh A. Wilson,** 53 President and Since 1989, Chairman and Chief Executive Officer, New
New Century Care, Inc. Trustee Century Care, Inc. (merchant bank); since 1995, Principal
53 Sylvan Road North of New Century Living, Inc.; since 1989, Director of
Westport, CT 06880 Chimney Rock Vineyard and Chimney Rock Winery;
President and Director of Key Mutual Funds.

Edward P. Campbell, 48 Trustee Since October 1997, President, Chief Executive Officer and
Nordson Corporation Director of Nordson Corporation (manufacturer of application
28601 Clemens Road equipment); July 1996 to October 1997, President and Chief
Westlake, OH 44145 Operating Officer of Nordson Corporation; from March 1994 to
July 1996, Executive Vice President and Chief Operating
Officer of Nordson Corporation; from May 1988 to March 1994,
Vice President of Nordson Corporation; from 1987 to December
1994, member of the Supervisory Committee of Society's
Collective Investment Retirement Fund; from May 1991 to
August 1994, Trustee, Financial Reserves Fund and from May
1993 to August 1994, Trustee, Ohio Municipal Money Market
Fund. Currently, Director of Key Mutual Funds.

Dr. Harry Gazelle, 70 Trustee Retired radiologist, Drs. Hill and Thomas Corporation.
17822 Lake Road
Lakewood, OH 44107

27
<PAGE>

Eugene J. McDonald, 66 Trustee Since 1990, Executive Vice President and Chief
Duke Management Company Investment Officer for Asset Management of Duke
2200 West Main Street University and President and CEO of Duke Management
Suite 1000 Company; Director of CCB Financial Corporation, Flag
Durham, NC 27705 Group of Mutual Funds, DP Mann Holdings, Key Mutual
Funds, Greater Triangle Community Foundation, and NC
Bar Association Investment Committee.

Dr. Thomas F. Morrissey, 65 Trustee 1995 Visiting Scholar, Bond University, Queensland,
Weatherhead School of Australia; Professor, Weatherhead School of Management, Case
Management Western Reserve University; from 1989 to 1995, Associate Dean
Case Western Reserve of Weatherhead School of Management; from 1987 to December
University 1994, Member of the Supervisory Committee of Society's
10900 Euclid Avenue Collective Investment Retirement Fund; from May 1991 to
Cleveland, OH 44106-7235 August 1994, Trustee, Financial Reserves Fund and from May
1993 to August 1994, Trustee, Ohio Municipal Money Market
Fund.

H. Patrick Swygert, 55 Trustee Since 1995, President, Howard University; from 1990 to
Howard University 1995 President, State University of New York at Albany;
2400 6th Street, N.W. from 1987 to 1990, Executive Vice President, Temple
Suite 402 University.
Washington, DC 20059

Frank A. Weil, 67 Trustee Chairman and Chief Executive Officer of Abacus &
Abacus & Associates Associates, Inc. (private investment firm); Director and
147 E. 47th Street President of the Norman and Hickrill Foundations;
New York, NY 10017 Director of Key Mutual Funds; Director, Trojan
Industries. Formerly, United States Assistant Secretary of
Commerce for Industry and Trade.

</TABLE>

* Mr. Noall is an "interested person" and an "affiliated person" of the
Trust.

** Mr. Wilson is deemed to be an "interested person" of the Trust under the
1940 Act solely by reason of his position as President.

The Board presently has an Investment Policy Committee, a Business, Legal, and
Audit Committee, and a Nominating Committee. The members of the Investment
Policy Committee are Messrs. Wilson and Morrissey, who will serve until August
1999. The function of the Investment Policy Committee is to review the existing
investment policies of the Trust, including the levels of risk and types of
funds available to shareholders, and make recommendations to the Trustees
regarding the revision of such policies or, if necessary, the submission of such
revisions to the Trust's shareholders for their consideration. The members of
the Business, Legal and Audit Committee are Messrs. Swygert (Chairman),
Campbell, and Gazelle who will serve until August 1999. The function of the
Business, Legal, and Audit Committee is to recommend independent auditors and
monitor accounting and financial matters and to review compliance and contract
matters. Mr. Campbell is the Chairman of the Nominating Committee which
nominates persons to serve as Independent Trustees and Trustees to serve on
committees of the Board.

REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS.

Each Trustee receives an annual fee of $2,500 for serving as Trustee of all the
Funds of the Trust, and an additional per meeting fee ($500 in person and $250
per telephonic meeting). The Adviser pays the fees and expenses of Mr.
Noall.

28
<PAGE>

The following table indicates the compensation that each Trustee is expected to
receive from the Victory "Fund Complex"(1) for the 12 month period ending
December 31, 1999.

Pension or
Retirement Estimated
Benefits Annual Aggregate Total Compensation
Accrued as Benefits Compensation from Victory
Fund Upon from Trust "Fund Complex"(1)
Expenses Retirement
<S> <C> <C> <C> <C>
Leigh A. Wilson -0- -0- $5,000 $50,000
Edward P. Campbell -0- -0- 5,000 41,600
Harry Gazelle -0- -0- 5,000 41,600
Eugene J. McDonald -0- -0- 5,000 41,600
Thomas F. Morrissey -0- -0- 5,000 41,600
H. Patrick Swygert -0- -0- 5,000 41,600

</TABLE>

(1) There are currently 39 mutual funds from which the above-named Trustees are
compensated in the Victory "Fund Complex," but not all of the above-named
Trustees serve on the board of each fund in the "Fund Complex."

OFFICERS.

The officers of the Trust, their ages, and principal occupations during the past
five years, are as follows:

Position(s) with
Name and Age the Trust Principal Occupation During Past 5 Years
- ------------ --------- ----------------------------------------

<S> <C> <C>
Leigh A. Wilson, 53 President and See biography under "Board of Trustees."
Trustee

William B. Blundin, 59 Vice President Senior Vice President of BISYS Fund Services ("BISYS");
officer of other investment companies administered by BISYS;
President and Chief Executive Officer of Vista Broker-Dealer
Services, Inc., Emerald Asset Management, Inc. and BNY
Hamilton Distributors, Inc., registered broker/dealers.

J. David Huber, 51 Vice President Vice President of BISYS.

Gary Tenkman, 27 Treasurer Since April 1998, Director, Financial Services, BISYS; from
July 1993 to March 1998, Ernst & Young LLP, Cincinnati
(Audit Manager of the Ohio Valley Investment Management
Services Group (8/97 to 3/98), Audit Senior (8/94 to 7/97); Audit
Staff (7/93 to 7/94)).

Michael J. Sullivan, 32 Secretary Since December 1996, Vice President of BISYS; from February
1995 to November 1996, President, Performance Financial
Group (a mutual fund consulting firm); from January 1993 to
January 1995, CEO, Performance Enterprises, Inc.
(manufacturing company).

Jay G. Baris, 44 Assistant Since 1994, Partner, Kramer, Levin, Naftalis & Frankel; from
Secretary 1992 to 1994, Partner, Reid & Priest.

29
<PAGE>

Alaina V. Metz, 30 Assistant Since June 1995, Chief Administrative and Regulatory Services,
Secretary BISYS; from May 1989 to June 1995, Supervisor, Mutual Fund
Legal Department, Alliance Capital Management.

</TABLE>

The mailing address of each of the officers of the Trust is 3435 Stelzer Road,
Columbus, Ohio 43219-3035.

The officers of the Trust (other than Mr. Wilson) receive no compensation
directly from the Trust for performing the duties of their offices. BISYS
receives fees from the Trust as Administrator.

As of July 31, 1998, the Trustees and officers as a group owned beneficially
less than 1% of all classes of outstanding shares of the Funds.

ADVISORY AND OTHER CONTRACTS

INVESTMENT ADVISER.

One of the Fund's most important contracts is with its investment adviser, KAM,
a New York corporation registered as an investment adviser with the SEC. KAM is
a wholly owned subsidiary of KeyBank National Association ("KeyBank"), a
wholly-owned subsidiary of KeyCorp. Affiliates of the Adviser manage
approximately $64 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals, and mutual funds.

KeyCorp, a financial services holding company, is headquartered at 127 Public
Square, Cleveland, Ohio 44114. As of June 30, 1998, KeyCorp had an asset base of
$76 billion, with banking offices in 13 states from Maine to Alaska, and trust
and investment offices in 14 states. KeyCorp's major business activities include
providing traditional banking and associated financial services to consumer,
business and commercial markets. Its non-bank subsidiaries include investment
advisory, securities brokerage, insurance, bank credit card processing, and
leasing companies.
KeyBank is the lead affiliate bank of KeyCorp.

The following schedule lists the advisory fees for each mutual fund that is
advised by the Adviser.

.20 OF 1% OF AVERAGE DAILY NET ASSETS
Investment Quality Bond Fund

.30 OF 1% OF AVERAGE DAILY NET ASSETS
Diversified Stock Fund
Small Company Value Fund

THE INVESTMENT ADVISORY AGREEMENT.

Unless sooner terminated, the Investment Advisory Agreement between KAM and the
Trust, on behalf of the Funds (the "Investment Advisory Agreement"), provides
that it will continue in effect as to the Funds for an initial two-year term and
for consecutive one-year terms thereafter, provided that such renewal is
approved at least annually by the Trustees or by vote of a majority of the
outstanding shares of each Fund (as defined under "Additional Information -
Miscellaneous"), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.

The Investment Advisory Agreement is terminable as to any particular Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, by vote of the Board, or by the
Adviser. The Investment Advisory Agreement also terminates automatically in the
event of any assignment, as defined in the 1940 Act.

30
<PAGE>

The Investment Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Funds in connection with the performance of services pursuant to the Investment
Advisory Agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith, or gross negligence on the part of the Adviser
in the performance of its duties, or from reckless disregard by it of its duties
and obligations thereunder.

Under the Investment Advisory Agreement, the Adviser may delegate a portion of
its responsibilities to a sub-adviser. In addition, the Investment Advisory
Agreement provides that the Adviser may render services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Funds and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of the Adviser.

GLASS-STEAGALL ACT.

In 1971 the United States Supreme Court held in Investment Company Institute v.
Camp that the federal statute commonly referred to as the Glass-Steagall Act
prohibits a national bank from operating a fund for the collective investment of
managing agency accounts. Subsequently, the Board of Governors of the Federal
Reserve System (the "Board of Governors") issued a regulation and interpretation
to the effect that the Glass-Steagall Act and such decision: (a) forbid a bank
holding company registered under the Federal Bank Holding Company Act of 1956
(the "Holding Company Act") or any non-bank affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board of Governors did not exceed its
authority under the Holding Company Act when it adopted its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to registered closed-end investment companies. In
the Board of Governors case, the Supreme Court also stated that if a national
bank complied with the restrictions imposed by the Board of Governors in its
regulation and interpretation authorizing bank holding companies and their
non-bank affiliates to act as investment advisers to investment companies, a
national bank performing investment advisory services for an investment company
would not violate the Glass-Steagall Act.

From time to time, advertisements, supplemental sales literature and information
furnished to present or prospective shareholders of the Funds may include
descriptions of Key Trust Company of Ohio, N.A. ("Key Trust") and the Adviser
including, but not limited to, (1) descriptions of the operations of Key Trust
and the Adviser; (2) descriptions of certain personnel and their functions; and
(3) statistics and rankings related to the operations of Key Trust and the
Adviser.

PORTFOLIO TRANSACTIONS.

Pursuant to the Investment Advisory Agreement, the Adviser determine, subject to
the general supervision of the Board, and in accordance with each Fund's
investment objective and restrictions, which securities are to be purchased and
sold by the Funds, and which brokers are to be eligible to execute its portfolio
transactions. Purchases from underwriters and/or broker-dealers of portfolio
securities include a commission or concession paid by the issuer to the
underwriter and/or broker-dealer and purchases from dealers serving as market
makers may include the spread between the bid and asked price. While the Adviser
generally seeks competitive spreads or commissions, each Fund may not
necessarily pay the lowest spread or commission available on each transaction,
for reasons discussed below.

Allocation of transactions to dealers is determined by the Adviser in their best
judgment and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who provide

31
<PAGE>

supplemental investment research to the Adviser may receive orders for
transactions by the Trust. Information so received is in addition to and not in
lieu of services required to be performed by the Adviser and does not reduce the
investment advisory fees payable to the Adviser by the Funds. Such information
may be useful to the Adviser in serving both the Trust and other clients and,
conversely, such supplemental research information obtained by the placement of
orders on behalf of other clients may be useful to the Adviser in carrying out
its obligations to the Trust. The Trustees have authorized the allocation of
brokerage to affiliated broker-dealers on an agency basis to effect portfolio
transactions. The Trustees have adopted procedures incorporating the standards
of Rule 17e-1 of the 1940 Act, which require that the commission paid to
affiliated broker-dealers must be "reasonable and fair compared to the
commission, fee or other remuneration received, or to be received, by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." At times, the Funds may also purchase
portfolio securities directly from dealers acting as principals, underwriters or
market makers. As these transactions are usually conducted on a net basis, no
brokerage commissions are paid by the Funds.

The Trust will not execute portfolio transactions through, acquire portfolio
securities issued by, make savings deposits in, or enter into repurchase or
reverse repurchase agreements with the Adviser, Key Trust or its affiliates, or
BISYS or its affiliates, and will not give preference to Key Trust's
correspondent banks or affiliates, or BISYS with respect to such transactions,
securities, savings deposits, repurchase agreements, and reverse repurchase
agreements.

Investment decisions for each Fund are made independently from those made for
the other Funds of the Trust or any other investment company or account managed
by the Adviser. Such other investment companies or accounts may also invest in
the securities in which the Funds invest, and the Funds may invest in similar
securities. When a purchase or sale of the same security is made at
substantially the same time on behalf of a Fund and any other Fund, investment
company or account, the transaction will be averaged as to price, and available
investments allocated as to amount, in a manner which the Adviser believes to be
equitable to such Funds, investment company or account. In some instances, this
investment procedure may affect the price paid or received by a Fund or the size
of the position obtained by the Fund in an adverse manner relative to the result
that would have been obtained if only that particular Fund had participated in
or been allocated such trades. To the extent permitted by law, the Adviser may
aggregate the securities to be sold or purchased for a Fund with those to be
sold or purchased for the other funds of the Trust or for other investment
companies or accounts in order to obtain best execution. In making investment
recommendations for the Trust, the Adviser will not inquire or take into
consideration whether an issuer of securities proposed for purchase or sale by a
Fund is a customer of the Adviser, their parents or subsidiaries or affiliates
and, in dealing with their commercial customers, the Adviser, its parent,
subsidiaries, and affiliates will not inquire or take into consideration whether
securities of such customers are held by the Trust.

ADMINISTRATOR.

BISYS (or the "Administrator") serves as administrator to the Funds pursuant to
an administration agreement dated August 28, 1998 (the "Administration
Agreement"). The Administrator assists in supervising all operations of the
Funds (other than those performed by the Adviser under the Investment Advisory
Agreement), subject to the supervision of the Board.

For the services rendered to the Funds and related expenses borne by BISYS as
Administrator, each Fund pays BISYS an annual fee, computed daily and paid
monthly, at the following annual rates based on each Fund's average daily net
assets:

.15% for portfolio assets of $300 million and less,

.12% for the next $300 million through $600 million of portfolio assets;
and

.10% for portfolio assets greater than $600 million.

32
<PAGE>

BISYS may periodically waive all or a portion of its fee with respect to any
Fund in order to increase the net income of one or more of the Funds available
for distribution to shareholders.

Unless sooner terminated, the Administration Agreement will continue in effect
as to each Fund for a period of two years, and for consecutive one-year terms
thereafter, provided that such renewal is ratified at least annually by the
Trustees or by vote of a majority of the outstanding shares of each Fund, and in
either case by a majority of the Trustees who are not parties to the
Administration Agreement or interested persons (as defined in the 1940 Act) of
any party to the Administration Agreement, by votes cast in person at a meeting
called for such purpose.

The Administration Agreement provides that BISYS shall not be liable for any
error of judgment or mistake of law or any loss suffered by the Trust in
connection with the matters to which the Administration Agreement relates,
except a loss resulting from willful misfeasance, bad faith, or gross negligence
in the performance of its duties, or from the reckless disregard by it of its
obligations and duties thereunder.

Under the Administration Agreement, BISYS assists in each Fund's administration
and operation, including providing statistical and research data, clerical
services, internal compliance and various other administrative services,
including among other responsibilities, forwarding certain purchase and
redemption requests to the Transfer Agent, participation in the updating of the
prospectus, coordinating the preparation, filing, printing and dissemination of
reports to shareholders, coordinating the preparation of income tax returns,
arranging for the maintenance of books and records and providing the office
facilities necessary to carry out the duties thereunder. Under the
Administration Agreement, BISYS may delegate all or any part of its
responsibilities thereunder.

SUB-ADMINISTRATOR.

KAM serves as sub-administrator to the Funds pursuant to a sub-administration
agreement dated August 28, 1998 (the "Sub-Administration Agreement"). As
sub-administrator, KAM assists the Administrator in all aspects of the
operations of the Funds, except those performed by KAM under its Investment
Advisory Agreement.

For services provided under the Sub-Administration Agreement, the Administrator
pays KAM a fee, with respect to each Fund, calculated at the annual rate of up
to five one-hundredths of one percent (0.05%) of such Fund's average daily net
assets. Except as otherwise provided in the Administration Agreement, KAM shall
pay all expenses incurred by it in performing its services and duties as
sub-administrator. Unless sooner terminated, the Sub-Administration Agreement
will continue in effect as to each Fund for a period of two years, and for
consecutive one-year terms thereafter, unless written notice not to renew is
given by the non-renewing party.

Under the Sub-Administration Agreement, KAM's duties include maintaining office
facilities, furnishing statistical and research data, compiling data for various
state and federal filings by the Funds, assist in mailing and filing the Funds'
annual and semi-annual reports to shareholders, providing support for board
meetings, and arranging for the maintenance of books and records and providing
the office facilities necessary to carry out the duties thereunder.

DISTRIBUTOR.

BISYS serves as distributor (the "Distributor") for the continuous offering of
the shares of the Funds pursuant to a Distribution Agreement between the
Distributor and the Trust. Unless otherwise terminated, the Distribution
Agreement will remain in effect with respect to each Fund for two years, and
thereafter for consecutive one-year terms, provided that it is approved at least
annually (1) by the Trustees or by the vote of a majority of the outstanding
shares of each Fund, and (2) by the vote of a majority of the Trustees of the
Trust who are not parties to the Distribution Agreement or interested persons of
any such party, cast

33
<PAGE>

in person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement will terminate in the event of its assignment, as defined
under the 1940 Act.

DISTRIBUTION AND SERVICE PLAN

The Trust, on behalf of the Class A Shares of the Funds, has adopted a
Distribution and Service Plan (the "Plan") pursuant to Rule 12b-1 under the 1940
Act. Rule 12b-1 provides, in substance, that a mutual fund may not engage
directly or indirectly in financing any activity that is primarily intended to
result in the sale of shares of such mutual fund except pursuant to a plan
adopted by the fund under Rule 12b-1. The Board has adopted the Plan to allow
the Adviser and the Distributor to incur certain expenses that might be
considered to constitute indirect payment by the Funds of distribution expenses.
Under the Plan, if a payment to the Adviser of management fees or to the
Distributor of administrative fees should be deemed to be indirect financing by
the Trust of the distribution of their shares, such payment is authorized by the
Plan.

The Plan specifically recognizes that the Adviser or the Distributor, directly
or through an affiliate, may use its fee revenue, past profits, or other
resources, without limitation, to pay promotional and administrative expenses in
connection with the offer and sale of Class A Shares of the Funds. In addition,
the Plan provides that the Adviser and the Distributor may use their respective
resources, including fee revenues. to make payments to third parties that
provide assistance in selling the Funds' Class A Shares, or to third parties,
including banks, that render shareholder support services.

The Plan has been approved by the Board. As required by the Rule, the Trustees
carefully considered all pertinent factors relating to the implementation of the
Plan prior to its approval, and have determined that there is a reasonable
likelihood that the Plan will benefit the Funds and their Class A shareholders.
In particular, the Trustees noted that the Plan does not authorize payments by
the Funds other than the advisory and administrative fees authorized under the
investment advisory and administration agreements. To the extent that the Plan
gives the Adviser or the Distributor greater flexibility in connection with the
distribution of shares of the Funds, additional sales of the Funds' Class A
Shares may result. Additionally, certain shareholder support services may be
provided more effectively under the Plan by local entities with whom
shareholders have other relationships.

CLASS B SHARES DISTRIBUTION PLAN.

The Trust, on behalf of the Class B Shares of each Fund, has adopted a
Distribution Plan (the "12b-1 Plan") pursuant to Rule 12b-1 under the 1940 Act.
The Distribution Plan provides that each Fund will pay the Distributor a fee at
the annual rate of up to 0.25% of the average daily net assets of the Fund's
Class B Shares. In approving the 12b-1 Plan, described in the Class B Share
prospectus, the Board reviewed the 12b-1 Plan and related materials, including
information relating to the advantages and disadvantages of Rule 12b-1 plans
currently in use by other mutual funds. Legal counsel for the Trust provided
additional information, summarized the 12b-1 Plan's provisions and discussed
legal and regulatory issues relating to the 12b-1 Plan's adoption.

In reviewing the 12b-1 Plan, the Board considered various factors, including:
(a) the circumstances that would make implementation of a Rule 12b-1 plan
necessary and appropriate; (b) the way that the 12b-1 Plan would address those
circumstances, including the nature and amount of potential expenditures; (c)
the anticipated benefits; (d) the possible benefits of the 12b-1 Plan to others
relative to the Trust; (e) the merits of alternative plans; (f) competitive
conditions in the variable products industry; and (g) the relationship of the
12b-1 Plan to other distribution efforts of the Trust.

Based on this review, and in light of its state and Federal law fiduciary
duties, the Board, exercising its business judgment, determined that the 12b-1
Plan is reasonably likely to benefit the Trust and the contract and policy
holders in the following ways: (a) payments under the 12b-1 Plan would motivate
the participating insurance companies to educate contract and policy holders and
sales people concerning the Funds and to maintain and enhance the level of
services provided to contract and policy holders; and (b) the adoption of the
12b-1 Plan would maintain and possibly increase net assets under management.

The 12b-1 Plan and any Rule 12b-1-related agreement that is entered into by the
Trust or the Distributor in connection with the 12b-1 Plan will continue in
effect for a period of more than one year, so long as continuance is
specifically approved at least annually by a vote of a majority of the Trust's
Board, and of a majority of the Independent Trustees, cast in person at a
meeting called for the purpose of voting on the 12b-1 Plan or Rule 12b-1-related
agreement, as applicable. In addition, the 12b-1 Plan and any Rule 12b-1-related
agreement may be terminated as to any Fund's Class B Shares, without penalty, by
a vote of a majority of the outstanding Class B Shares of that Fund or by a vote
of a majority of the Independent Trustees. The 12b-1 Plan also provides that it
may not be amended to increase materially the amount that may be spent for
distribution of Class B Shares of a Fund without the approval of Class B
shareholders of that Fund.

TRANSFER AGENT.

State Street Bank and Trust Company ("State Street") serves as transfer agent
for the Funds. Boston Financial Data Services, Inc. ("BFDS") serves as the
dividend disbursing agent and shareholder servicing agent for the Funds,
pursuant to a Transfer Agency and Service Agreement. Under its agreement with
the Trust, State Street has agreed (1) to issue and redeem shares of the Trust;
(2) to address and mail all communications by the Trust to its shareholders,
including reports to shareholders, dividend and distribution notices, and proxy
material for its meetings of shareholders; (3) to respond to correspondence or
inquiries by shareholders and others relating to its duties; (4) to maintain
shareholder accounts and certain sub-accounts; and (5) to make periodic reports
to the Trustees concerning the Trust's operations. BFDS is located at Two
Heritage Drive, Quincy, Massachusetts 02171.

SHAREHOLDER SERVICING PLAN.

Payments made under the Shareholder Servicing Plan to Shareholder Servicing
Agents (which may include affiliates of the Adviser) are for administrative
support services to customers who may from time to time beneficially own shares,
which services may include: (1) aggregating and processing purchase and
redemption

34
<PAGE>

requests for shares from customers and transmitting promptly net purchase and
redemption orders to our distributor or transfer agent; (2) providing customers
with a service that invests the assets of their accounts in shares pursuant to
specific or pre-authorized instructions; (3) processing dividend and
distribution payments on behalf of customers; (4) providing information
periodically to customers showing their positions in shares; (5) arranging for
bank wires; (6) responding to customer inquiries; (7) providing subaccounting
with respect to shares beneficially owned by customers or providing the
information to the Funds as necessary for subaccounting; (8) if required by law,
forwarding shareholder communications from us (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to customers; (9) forwarding to customers proxy statements and
proxies containing any proposals which require a shareholder vote; and (10)
providing such other similar services as the Trust may reasonably request to the
extent permitted under applicable statutes, rules or regulations.

OTHER SERVICING PLANS.

In connection with certain servicing plans, the Funds have made certain
commitments that: (i) provide for one or more brokers to accept on the Funds'
behalf, purchase and redemption orders; (ii) authorize such brokers to designate
other intermediaries to accept purchase and redemption orders on the Funds'
behalf; (iii) provide that the Funds will be deemed to have received a purchase
or redemption order when an authorized broker or, if applicable, a broker's
authorized designee, accepts the order; and (iv) provide that customer orders
will be priced at the Funds' Net Asset Value next computed after they are
accepted by an authorized broker or the broker's authorized designee.

FUND ACCOUNTANT.

BISYS Fund Services Ohio, Inc. ("BISYS, Inc.") serves as fund accountant for the
all of the Funds pursuant to a fund accounting agreement with the Trust dated
August 28, 1998 (the "Fund Accounting Agreement"). As fund accountant for the
Trust, BISYS, Inc. calculates each Fund's net asset value, the dividend and
capital gain distribution, if any, and the yield. BISYS, Inc. also provides a
current security position report, a summary report of transactions and pending
maturities, a current cash position report, and maintains the general ledger
accounting records for the Funds. Under the Fund Accounting Agreement, BISYS,
Inc. is entitled to receive annual fees of .03% of the first $100 million of the
Fund's daily average net assets, .02% of the next $100 million of the Fund's
daily average net assets, and .01% of the Fund's remaining daily average net
assets. These annual fees are subject to a minimum monthly assets charge of
$2,500 per Fund and does not include out-of-pocket expenses or multiple class
charges of $833 per month assessed for each class of shares after the first
class.

CUSTODIAN.

Cash and securities owned by each of the Funds are held by Key Trust as
custodian pursuant to a Custodian Agreement dated August 28, 1998. Cash and
securities owned by the Funds are also held by Morgan Stanley Trust Company
("Morgan Stanley") as sub-custodian, and certain foreign sub-custodians,
pursuant to a Sub-Custody Agreement. Under these Agreements, Key Trust and
Morgan Stanley each (1) maintains a separate account or accounts in the name of
each respective fund; (2) makes receipts and disbursements of money on behalf of
each Fund; (3) collects and receives all income and other payments and
distributions on account of portfolio securities; (4) responds to correspondence
from security brokers and others relating to its duties; and (5) makes periodic
reports to the Trustees concerning the Trust's operations. Key Trust may, with
the approval of a Fund and at the custodian's own expense, open and maintain a
sub-custody account or accounts on behalf of a fund, provided that Key Trust
shall remain liable for the performance of all of its duties under the Custodian
Agreement.

INDEPENDENT ACCOUNTANTS.

PricewaterhouseCoopers LLP, located at 100 East Broad Street, Columbus, Ohio
43215, serves as the Trust's independent accountants.

35
<PAGE>

LEGAL COUNSEL.

Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022 is
the counsel to the Trust.

EXPENSES.

The Funds bear the following expenses relating to its operations: taxes,
interest, brokerage fees and commissions, fees of the Trustees, SEC fees, state
securities qualification fees, costs of preparing and printing prospectuses for
regulatory purposes and for distribution to current shareholders, outside
auditing and legal expenses, advisory and administration fees, fees and
out-of-pocket expenses of the custodian and transfer agent, certain insurance
premiums, costs of maintenance of the fund's existence, costs of shareholders'
reports and meetings, and any extraordinary expenses incurred in the Funds'
operation.

ADDITIONAL INFORMATION

DESCRIPTION OF SHARES.

The Trust is a Delaware business trust and was formed on February 11, 1998. The
Delaware Trust Instrument authorizes the Trustees to issue an unlimited number
of shares, which are units of beneficial interest, without par value. The Trust
currently has six series of shares, three of which represent interests in Class
A Shares and Class B Shares of the Funds.

The Trust Instrument authorizes the Trustees to divide or redivide any unissued
shares of the Trust into one or more additional series by setting or changing in
any one or more aspects their respective preferences, conversion or other
rights, voting power, restrictions, limitations as to dividends, qualifications,
and terms and conditions of redemption.

Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Trustees may grant in their discretion. When issued for
payment as described in the Prospectuses and this SAI, the Trust's shares will
be fully paid and non-assessable. In the event of a liquidation or dissolution
of the Trust, shares of a Fund are entitled to receive the assets available for
distribution belonging to the fund, and a proportionate distribution, based upon
the relative asset values of the respective funds, of any general assets not
belonging to any particular fund which are available for distribution.

Shares of the Trust are entitled to one vote per share (with proportional voting
for fractional shares) on such matters as shareholders are entitled to vote.
Shareholders vote as a single class on all matters except (1) when required by
the 1940 Act, shares shall be voted by individual series, and (2) when the
Trustees have determined that the matter affects only the interests of one or
more series, then only shareholders of such series shall be entitled to vote
thereon. There will normally be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees have been elected by the shareholders, at which time the Trustees then
in office will call a shareholders' meeting for the election of Trustees. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the qualifications of Section 16(c) of the 1940 Act,
(i.e., persons who have been shareholders for at least six months, and who hold
shares having a net asset value of at least $25,000 or constituting 1% of the
outstanding shares) stating that such shareholders wish to communicate with the
other shareholders for the purpose of obtaining the signatures necessary to
demand a meeting to consider removal of a Trustee, the Trust will provide a list
of shareholders or disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint their successors.

Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been

36
<PAGE>

effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Trust affected by the matter. For
purposes of determining whether the approval of a majority of the outstanding
shares of a fund will be required in connection with a matter, a fund will be
deemed to be affected by a matter unless it is clear that the interests of each
fund in the matter are identical, or that the matter does not affect any
interest of the fund. Under Rule 18f-2, the approval of an investment advisory
agreement or any change in investment policy would be effectively acted upon
with respect to a fund only if approved by a majority of the outstanding shares
of such fund. However, Rule 18f-2 also provides that the ratification of
independent accountants, the approval of principal underwriting contracts, and
the election of Trustees may be effectively acted upon by shareholders of the
Trust voting without regard to series.

SHAREHOLDER AND TRUSTEE LIABILITY.

The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to shareholders of Delaware corporations, and the Trust Instrument
provides that shareholders of the Trust shall not be liable for the obligations
of the Trust. The Trust Instrument also provides for indemnification out of the
trust property of any shareholder held personally liable solely by reason of his
or her being or having been a shareholder. The Trust Instrument also provides
that the Trust shall, upon request, assume the defense of any claim made against
any shareholder for any act or obligation of the Trust, and shall satisfy any
judgment thereon. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is considered to be extremely remote.

The Trust Instrument states further that no Trustee, officer, or agent of the
Trust shall be personally liable in connection with the administration or
preservation of the assets of the funds or the conduct of the Trust's business;
nor shall any Trustee, officer, or agent be personally liable to any person for
any action or failure to act except for his own bad faith, willful misfeasance,
gross negligence, or reckless disregard of his duties. The Trust Instrument also
provides that all persons having any claim against the Trustees or the Trust
shall look solely to the assets of the Trust for payment.

MISCELLANEOUS.

As used in the Prospectuses and in this SAI, "assets belonging to a fund" (or
"assets belonging to the Fund") means the consideration received by the Trust
upon the issuance or sale of shares of a Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale, exchange, or liquidation of such investments, and
any funds or payments derived from any reinvestment of such proceeds and any
general assets of the Trust, which general liabilities and expenses are not
readily identified as belonging to a particular Fund that are allocated to that
Fund by the Trustees. The Trustees may allocate such general assets in any
manner they deem fair and equitable. It is anticipated that the factor that will
be used by the Trustees in making allocations of general assets to a particular
fund of the Trust will be the relative net asset value of each respective fund
at the time of allocation. Assets belonging to a particular Fund are charged
with the direct liabilities and expenses in respect of that Fund, and with a
share of the general liabilities and expenses of each of the Funds not readily
identified as belonging to a particular Fund, which are allocated to each Fund
in accordance with its proportionate share of the net asset values of the Trust
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Trust to a particular fund will be
determined by the Trustees and will be in accordance with generally accepted
accounting principles. Determinations by the Trustees as to the timing of the
allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to a particular fund are
conclusive.

As used in the Prospectuses and in this SAI, a "vote of a majority of the
outstanding shares" of the Fund means the affirmative vote of the lesser of (a)
67% or more of the shares of the Fund present at a meeting at which the holders
of more than 50% of the outstanding shares of the Fund are represented in person
or by proxy, or (b) more than 50% of the outstanding shares of the Fund.

37
<PAGE>

The Trust is registered with the SEC as an open-end management investment
company. Such registration does not involve supervision by the SEC of the
management or policies of the Trust.

The Prospectuses and this SAI omit certain of the information contained in the
Registration Statement filed with the SEC. Copies of such information may be
obtained from the SEC upon payment of the prescribed fee.

KAM may be deemed to control the Trust.

THE PROSPECTUSES AND THIS SAI ARE NOT AN OFFERING OF THE SECURITIES DESCRIBED IN
THESE DOCUMENTS IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO
SALESMAN, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE
ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THE PROSPECTUSES AND THIS SAI.

38
<PAGE>

APPENDIX

DESCRIPTION OF SECURITY RATINGS.

The NRSROs that may be utilized by the Adviser with regard to portfolio
investments for the Funds include Moody's and S&P. Set forth below is a
description of the relevant ratings of each such NRSRO. The NRSROs that may be
utilized by the Adviser and the description of each NRSRO's ratings is as of the
date of this SAI, and may subsequently change.

LONG-TERM DEBT RATINGS (may be assigned, for example, to corporate and municipal
bonds).

Description of the five highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (e.g., 1, 2, and 3) in each rating category to
indicate the security's ranking within the category):

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

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

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

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

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

Description of the five highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):

AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

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

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

39
<PAGE>

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

BB. Debt rated BB is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.

SHORT-TERM DEBT RATINGS (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit).

Moody's description of its three highest short-term debt ratings:

Prime-1. Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by many of the following
characteristics:

- - Leading market positions in well-established industries.

- - High rates of return on funds employed.

- - Conservative capitalization structures with moderate reliance on debt and
ample asset protection.

- - Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.

- - Well-established access to a range of financial markets and assured sources
of alternate liquidity.

Prime-2. Issuers rated Prime-2 (or supporting institutions) have a strong
capacity for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

Prime-3. Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.

S&P's description of its three highest short-term debt ratings:

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

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

A-3. Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.

40
<PAGE>

SHORT-TERM LOAN/MUNICIPAL NOTE RATINGS

Moody's description of its two highest short-term loan/municipal note ratings:

MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.

MIG-2/VMIG-2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.

S&P's description of its two highest municipal note ratings:

SP-1. Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.

SP-2. Satisfactory capacity to pay principal and interest.

<PAGE>

PART C. OTHER INFORMATION
-------------------------

ITEM 23. EXHIBITS
--------

(a) (1) Certificate of Trust.

(a) (2) Trust Instrument.

(b) By-laws.

(d) Investment Advisory Agreement between Registrant and Key
Asset Management Inc. ("KAM").*

(e) Distribution Agreement between Registrant and BISYS Fund
Services ("BISYS").*

(f) Not Applicable.

(g) Custodian Agreement between Registrant and Key Trust Company
of Ohio, N.A.*

(h) Not Applicable.

(i)(1) Opinion of Kramer, Levin, Naftalis &
Frankel as to legality of securities being
registered.*

(i)(2) Opinion of Morris, Nichols, Arsht & Tunnell, Delaware counsel
to Registrant.*

(j)(1) Consent of Kramer, Levin, Naftalis &
Frankel, counsel to Registrant.

(j)(2) Consent of Pricewaterhouse Coopers LLP, Independent
Accountants.

(k) Not Applicable.

(l) Purchase Agreement.*

(m) Rule 12b-1 Distribution Plan.*

(n) Not Applicable.

(o) Rule 18f-3 Plan.*

(p) Powers of Attorney of Leigh A. Wilson, Roger Noall, Edward P.
Campbell, Harry Gazelle, Thomas F. Morrissey, H. Patrick
Swygert, Frank A. Weil and Eugene J. McDonald.

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

* To be filed by amendment.

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

None.

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ITEM 25. INDEMNIFICATION
---------------

Article X, Section 10.02 of Registrant's Delaware Trust Instrument,
attached hereto as Exhibit (a)(2), provides for the indemnification of
Registrant's Trustees and officers, as follows:

"SECTION 10.02 INDEMNIFICATION.

(a) Subject to the exceptions and limitations contained in Subsection
10.02(b):

(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as a "Covered Person") shall be indemnified
by the Trust to the fullest extent permitted by law against liability and
against all expenses reasonably incurred or paid by him in connection with
any claim, action, suit or proceeding in which he becomes involved as a
party or otherwise by virtue of his being or having been a Trustee or
officer and against amounts paid or incurred by him in the settlement
thereof;

(ii) the words "claim," "action," "suit," or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened while in office or thereafter, and
the words "liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines,
penalties and other liabilities.

(b) No indemnification shall be provided hereunder to a Covered Person:

(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office
or (B) not to have acted in good faith in the reasonable belief that his
action was in the best interest of the Trust; or

(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office, (A) by the court or other
body approving the settlement; (B) by at least a majority of those Trustees
who are neither Interested Persons of the Trust nor are parties to the
matter based upon a review of readily available facts (as opposed to a full
trial-type inquiry); or (C) by written opinion of independent legal counsel
based upon a review of readily available facts (as opposed to a full
trial-type inquiry).

(c) The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now
or hereafter be entitled, shall continue as to a person who has ceased to
be a Covered Person and shall inure to the benefit of the heirs, executors
and administrators of such a person. Nothing contained herein shall affect
any rights to indemnification to which Trust personnel, other than Covered
Persons, and other persons may be entitled by contract or otherwise under
law.

C-2

<PAGE>

it is ultimately determined that he is not entitled to indemnification
under this Section 10.02; provided, however, that either (i) such Covered
Person shall have provided appropriate security for such undertaking, (ii)
the Trust is insured against losses arising out of any such advance
payments or (iii) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the matter, or independent
legal counsel in a written opinion, shall have determined, based upon a
review of readily available facts (as opposed to a trial-type inquiry or
full investigation), that there is reason to believe that such Covered
Person will be found entitled to indemnification under this Section 10.02."

Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to trustees,
officers, and controlling persons or Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Investment Company Act of 1940, as amended (the "1940 Act"),
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a trustee, officer, or controlling person of Registrant in
the successful defense of any action, suit, or proceeding) is asserted by such
trustee, officer, or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
----------------------------------------------------

KAM is the investment adviser to each of Registrant's Funds. KAM is a
wholly-owned indirect subsidiary of KeyCorp, a bank holding company which had
total assets of approximately $76 billion as of June 30, 1998. KeyCorp is a
leading financial institution doing business in 13 states from Maine to Alaska,
providing a full array of trust, commercial, and retail banking services. Its
non-bank subsidiaries include investment advisory, securities brokerage,
insurance, bank credit card processing, mortgage and leasing companies. KAM and
its affiliates have over $64 billion in assets under management, and provides a
full range of investment management services to personal and corporate clients.

To the knowledge of Registrant, none of the directors or officers of
KAM, except those set forth below, is or has been at any time during the past
two calendar years engaged in any other business, profession, vocation or
employment of a substantial nature, except that certain directors and officers
of KAM also hold positions with KeyCorp or its subsidiaries.

Directors:

William G. Spears, Senior Managing Director, Chairman and Chief Executive
Officer.

Richard J. Buoncore, Senior Managing Director, President and Chief
Operating Officer.

Anthony Aveni, Senior Managing Director and Chief Investment Officer.

Vincent DeP. Farrell, Senior Managing Director and Chief Investment
Officer. Also Chief Investment Officer, Executive Vice President and
Managing Director of Spears, Benzak, Salomon & Farrell Division ("SBSF").

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<PAGE>

Richard E. Salomon, Senior Managing Director. Also President and Director
of Wealth Management, SBSF.

Gary R. Martzolf, Senior Managing Director.

Other Officers:

Charles G. Crane, Senior Managing Director and Chief Market Strategist.

James D. Kacic, Chief Financial Officer, Chief Administrative Officer, and
Senior Managing Director.

William R. Allen, Managing Director.

Michael Foisel, Assistant Treasurer.

Michael Stearns, Chief Compliance Officer.

William J. Blake, Secretary.

Steven N. Bulloch, Assistant Secretary. Also, Senior Vice President and
Senior Counsel of KMC.

Kathleen A. Dennis, Senior Managing Director.

The business address of each of the foregoing individuals is 127 Public
Square, Cleveland, Ohio 44114.

ITEM 27. PRINCIPAL UNDERWRITERS
----------------------

(a) BISYS, Registrant's administrator, also acts as the distributor for
the following investment companies as of July 24, 1998.

Alpine Equity Trust
American Performance Funds
AmSouth Mutual Funds
The ARCH Fund, Inc.
The BB&T Mutual Funds Group
The Coventry Group
The Eureka Funds
Fountain Square Funds
Hirtle Callaghan Trust
HSBC Family of Funds
The Infinity Mutual Funds, Inc.
INTRUST Funds Trust
The Kent Funds
Magna Funds
Meyers Investment Trust
MMA Praxis Mutual Funds
M.S.D. & T. Funds
Pacific Capital Funds
Parkstone Group of Funds
The Parkstone Advantage Fund
Pegasus Funds

C-4

<PAGE>

The Republic Advisor Funds Trust
Puget Sound Asset Management
The Republic Funds Trust
The Riverfront Funds, Inc.
SBSF Funds, Inc. dba Key Mutual Funds
Sefton Funds
The Sessions Group
Summit Investment Trust
Variable Insurance Funds
The Victory Portfolios
Vintage Mutual Funds, Inc.

(b) Directors, officers and partners of BISYS Fund Services, Inc., the
General Partner of BISYS, as of June 15, 1998 were as follows:

Lynn J. Mangum, Chairman and CEO.

Dennis Sheehan, Director, Executive Vice President and Treasurer.

J. David Huber, President.

Kevin J. Dell, Vice President and Secretary.

Mark Rybarczyk, Senior Vice President.

William Tomko, Senior Vice President.

Michael D. Burns, Vice President.

David Blackmore, Vice President.

Steve Ludwig, Compliance Officer.

Robert Tuch, Assistant Secretary.

The business address of each of the foregoing individuals is BISYS Fund
Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43215.

ITEM I. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------

(1) Key Asset Management Inc., 127 Public Square, Cleveland, Ohio 44114-
1306 (records relating to its functions as investment adviser and sub-
administrator).

(2) KeyBank National Association, 127 Public Square, Cleveland, Ohio
44114- 1306 (records relating to its functions as shareholder
servicing agent).

(3) BISYS Fund Services, Inc. 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its functions as administrator, distributor and
fund accountant).

(4) State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110-3875 (records relating to its functions as
transfer agent).

C-5

<PAGE>

(5) Boston Financial Data Services, Inc. Two Heritage Drive, Quincy,
Massachusetts 02171 (records relating to its functions as dividend
disbursing agent and shareholder servicing agent).

(6) Key Trust Company of Ohio, N.A., 127 Public Square, Cleveland, Ohio
44114-1306 (records relating to its functions as custodian and
securities lending agent).

(7) Morgan Stanley Trust Company, 1585 Broadway, New York, New York 10036
(records relating to its functions as sub-custodian).

ITEM 29. MANAGEMENT SERVICES
-------------------
Not applicable.

ITEM 30. UNDERTAKING
-----------

Registrant undertakes to call a meeting of shareholders for the purpose
of voting upon the question of removal of a trustee or trustees if requested to
do so by the holders of at least 10% of Registrant's outstanding voting
securities, and to assist in communications with other shareholders, as required
by Section 16(c) of the 1940 Act.

C-6

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, and the State of New York on this 21st day
of August, 1998.

THE VICTORY VARIABLE FUNDS

By: /s/Leigh A. Wilson
--------------------
Leigh A. Wilson
President and Trustee

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 21st day of August, 1998.

/s/ Roger Noall Chairman of the Board and Trustee
- ---------------------
Roger Noall

/s/ Leigh A. Wilson President and Trustee
- ---------------------
Leigh A. Wilson

/s/Gary Tenkman Treasurer
- ---------------------
Gary Tenkman

* Trustee
- ---------------------
Edward P. Campbell

* Trustee
- ---------------------
Harry Gazelle

* Trustee
- ---------------------
Thomas F. Morrissey

* Trustee
- ---------------------
H. Patrick Swygert

* Trustee
- ---------------------
Frank A. Weil

* Trustee
- ---------------------
Eugene J. McDonald

*By: /s/ Carl Frischling
-------------------
Carl Frischling
Attorney-in-Fact

C-7

<PAGE>

EXHIBIT INDEX
-------------

(a)(1) Certificate of Trust.

(a)(2) Trust Instrument.

(b) By-laws.

(j)(1) Consent of Kramer, Levin, Naftalis & Frankel, counsel to Registrant.

(j)(2) Consent of PricewaterhouseCoopers LLP, Independent Accountants.

(p) Powers of Attorney of Leigh A. Wilson, Roger Noall, Edward P. Campbell,
Harry Gazelle, Thomas F. Morrissy, H. Patrick Swygert, Frank A. Weil and
Eugene J. McDonald.

CERTIFICATE OF TRUST
--------------------

This Certificate of Trust of The Victory Variable Funds (the "Trust"),
dated February 11, 1998, is being duly executed and filed by Carl Frischling and
Jay G. Baris, as trustees of the Trust, to form a business trust under the laws
of the State of Delaware.

1. Name. The name of the business trust formed hereby is The Victory
Variable Funds.

2. Registered Office. The address of the Trust's registered office in
the State of Delaware is 1201 North Market Street, P.O. Box 1347, Wilmington,
Delaware 19899-1347.

3. Registered Agent. The name of the Trust's registered agent at the
above listed address is Delaware Corporation Organizers, Inc.

4. Effective Date. This Certificate of Trust shall be effective upon
the date and time of filing.

5. Series Trust. Notice is hereby given that pursuant to Section 3804
of the Delaware Business Trust Act, the debts, liabilities, obligations and
expenses incurred, contracted for or otherwise existing with respect to a
particular series of the Trust shall be enforceable against the assets of such
series only and not against the assets of the Trust generally. The Trust is, or
will become prior to or within 180 days following the first issuance

<PAGE>

of shares of beneficial interests therein, a registered investment company under
the Investment Company Act of 1940, as amended.

IN WITNESS WHEREOF, the undersigned, being all of the Trustees of the
Trust, have executed this Certificate of Trust as of the date first above
written.

/s/ Carl Frischling
-------------------------------
Carl Frischling
as Trustee and not individually

/s/ Jay G. Baris
-------------------------------
Jay G. Baris
as Trustee and not individually

THE VICTORY VARIABLE FUNDS

TRUST INSTRUMENT

DATED FEBRUARY 11, 1998

<PAGE>

THE VICTORY VARIABLE FUNDS

TABLE OF CONTENTS

Page
ARTICLE I - NAME AND DEFINITIONS...............................................1
Section 1.01 Name....................................................1
Section 1.02 Definitions.............................................1

ARTICLE II - BENEFICIAL INTEREST...............................................2
Section 2.01 Shares Of Beneficial Interest...........................2
Section 2.02 Issuance of Shares......................................2
Section 2.03 Register of Shares and Share Certificates...............3
Section 2.04 Transfer of Shares......................................3
Section 2.05 Treasury Shares.........................................3
Section 2.06 Establishment of Series.................................3
Section 2.07 Investment in the Trust.................................4
Section 2.08 Assets and Liabilities of Series........................4
Section 2.09 No Preemptive Rights....................................5
Section 2.10 No Personal Liability of Shareholder....................5

ARTICLE III - THE TRUSTEES.....................................................6
Section 3.01 Management of the Trust.................................6
Section 3.02 Initial Trustees........................................6
Section 3.03 Term of Office..........................................6
Section 3.04 Vacancies and Appointments..............................7
Section 3.05 Temporary Absence.......................................7
Section 3.06 Number of Trustees......................................7
Section 3.07 Effect of Ending of a Trustee's Service.................7
Section 3.08 Ownership of Assets of the Trust........................7

ARTICLE IV - POWERS OF THE TRUSTEES............................................8
Section 4.01 Powers..................................................8
Section 4.02 Issuance and Repurchase of Shares..................... 11
Section 4.03 Trustees and Officers as Shareholders................. 11
Section 4.04 Action by the Trustees................................ 11
Section 4.05 Chairman of the Trustees.............................. 11
Section 4.06 Principal Transactions................................ 12

ARTICLE V - EXPENSES OF THE TRUST............................................ 12

ARTICLE VI - INVESTMENT ADVISER, PRINCIPAL UNDERWRITER,
ADMINISTRATOR AND TRANSFER AGENT................................ 13
Section 6.01 Investment Adviser.................................... 13
Section 6.02 Principal Underwriter................................. 13

<PAGE>

Section 6.03 Administration........................................ 13
Section 6.04 Transfer Agent........................................ 14
Section 6.05 Parties to Contract................................... 14
Section 6.06 Provisions and Amendments............................. 14

ARTICLE VII - SHAREHOLDERS' VOTING POWERS AND MEETINGS........................14
Section 7.01 Voting Powers..........................................14
Section 7.02 Meetings...............................................15
Section 7.03 Quorum and Required Vote...............................16

ARTICLE VIII - CUSTODIAN......................................................16
Section 8.01 Appointment and Duties.................................16
Section 8.02 Central Certificate System.............................17

ARTICLE IX - DISTRIBUTIONS AND REDEMPTIONS....................................17
Section 9.01 Distributions..........................................17
Section 9.02 Redemptions............................................18
Section 9.03 Determination of Net Asset Value and Valuation of
Portfolio Assets.......................................18
Section 9.04 Suspension of the Right of Redemption..................19
Section 9.05 Redemption of Shares in Order to qualify as
Regulated Investment Company...........................19

ARTICLE X - LIMITATION OF LIABILITY AND INDEMNIFICATION.......................19
Section 10.01 Limitation of Liability................................19
Section 10.02 Indemnification........................................20
Section 10.03 Shareholders...........................................21

ARTICLE XI - MISCELLANEOUS....................................................21
Section 11.01 Trust Not a Partnership................................21
Section 11.02 Trustee's Good Faith Action, Expert Advice,
No Bond or Surety................................... 21
Section 11.03 Establishment of Record Dates..........................22
Section 11.04 Termination of Trust...................................22
Section 11.05 Reorganization.........................................23
Section 11.06 Filing of Copies, References, Headings.................24
Section 11.07 Applicable Law.........................................24
Section 11.08 Amendments.............................................24
Section 11.09 Fiscal Year............................................25
Section 11.10 Name Reservation.......................................25
Section 11.11 Provisions in Conflict With Law........................25

<PAGE>

THE VICTORY VARIABLE FUNDS
February 11, 1998

TRUST INSTRUMENT, made by Carl Frischling and Jay G. Baris (the
"Trustees").

WHEREAS, the Trustees desire to establish a business trust for the
investment and reinvestment of funds contributed thereto;

NOW THEREFORE, the Trustees declare that all money and property
contributed to the trust hereunder shall be held and managed in trust under this
Trust Instrument as herein set forth below.

ARTICLE I
NAME AND DEFINITIONS

SECTION 1.01 NAME. The name of the trust created hereby is "The Victory
Variable Funds."

SECTION 1.02 DEFINITIONS. Wherever used herein, unless otherwise
required by the context or specifically provided:

(a) The "1940 Act" means the Investment Company Act of 1940, as amended
from time to time. Whenever reference is made hereunder to the 1940 Act, such
references shall be interpreted as including any applicable order or orders of
the Commission or any rules or regulations adopted by the Commission thereunder
or interpretive releases of the Commission staff;

(b) "Bylaws" means the Bylaws of the Trust as adopted by the Trustees,
as amended from time to time;

(c) "Commission" has the meaning given it in the 1940 Act. In addition,
"Affiliated Person," "Assignment," "Interested Person" and "Principal
Underwriter" shall have the respective meanings given them in the 1940 Act.
"Majority Shareholder Vote" shall have the same meaning as the term "vote of a
majority of the outstanding voting securities" under the 1940 Act;

(d) "Delaware Act" refers to Chapter 38 of Title 12 of the Delaware
Code entitled "Treatment of Delaware Business Trusts," as amended from time to
time;

(e) "Net Asset Value" means the net asset value of each Series of the
Trust determined in the manner provided in Article IX, Section 9.03 hereof;

(f) "Outstanding Shares" means those Shares shown from time to time in
the books of the Trust or its transfer agent as then issued and outstanding, but
shall not include Shares which have been redeemed or repurchased by the Trust
and which are at the time held in the treasury of

<PAGE>

the Trust;

(g) "Series" means a series of Shares of the Trust established in
accordance with the provisions of Article II, Section 2.06 hereof;

(h) "Shareholder" means a record owner of Outstanding Shares of the
Trust;

(i) "Shares" means the equal proportionate transferable units of
beneficial interest into which the beneficial interest of each Series of the
Trust or class thereof shall be divided and may include fractions of Shares as
well as whole Shares;

(j) The "Trust" means The Victory Variable Funds, a Delaware business
trust, and reference to the Trust when applicable to one or more Series of the
Trust, shall refer to any such Series;

(k) The "Trustees" means the person or persons who has or have signed
this Trust Instrument so long as he or they shall continue in office in
accordance with the terms hereof and all other persons who may from time to time
be duly qualified and serving as Trustees in accordance with the provisions of
Article III hereof, and reference herein to a Trustee or to the Trustees shall
refer to the individual Trustees in their respective capacity as Trustees
hereunder;

(l) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of one or
more of the Trust or any Series, or the Trustees on behalf of the Trust or any
Series.

ARTICLE II
BENEFICIAL INTEREST

SECTION 2.01 SHARES OF BENEFICIAL INTEREST. The beneficial interest in
the Trust shall be divided into such Shares of one or more separate and distinct
Series or classes of a Series as set forth in Section 2.06 or as the Trustees
shall otherwise from time to time create and establish as provided in Section
2.06. The number of Shares of each Series and class thereof authorized hereunder
is unlimited. Each Share shall have a par value of $0.001. All Shares issued
hereunder, including without limitation, Shares issued in connection with a
dividend paid in Shares or a split of Shares, shall be fully paid and
non-assessable.

SECTION 2.02 ISSUANCE OF SHARES. The Trustees in their discretion may,
from time to time, without a vote of the Shareholders, issue Shares, in addition
to the then issued and outstanding Shares and Shares held in the treasury, to
such party or parties and for such amount and type of consideration, subject to
applicable law, including cash or securities, at such time or times and on such
terms as the Trustees may deem appropriate, and may in such manner acquire other
assets (including the acquisition of assets subject to, and in connection with,
the assumption

-2-

<PAGE>

of liabilities) and businesses. In connection with any issuance of Shares, the
Trustees may issue fractional Shares and Shares held in the treasury. The
Trustees may from time to time divide or combine the Shares into a greater or
lesser number without thereby changing the proportionate beneficial interests in
the Trust. Contributions to the Trust may be accepted for, and Shares shall be
redeemed as, whole Shares and/or 1/1000th of a Share or integral multiples
thereof. The Trustees or any person the Trustees may authorize for the purpose
may, in their discretion, reject any application for the issuance of shares.

SECTION 2.03 REGISTER OF SHARES AND SHARE CERTIFICATES. A register shall
be kept at the principal office of the Trust or an office of the Trust's
transfer agent which shall contain the names and addresses of the Shareholders
of each Series, the number of Shares of that Series (or any class or classes
thereof) held by them respectively and a record of all transfers thereof. No
share certificates shall be issued by the Trust except as the Trustees may
otherwise authorize, and the persons indicated as shareholders in such register
shall be entitled to receive dividends or other distributions or otherwise to
exercise or enjoy the rights of Shareholders. No Shareholder shall be entitled
to receive payment of any dividend or other distribution, nor to have notice
given to him as herein or in the Bylaws provided, until he has given his address
to the transfer agent or such officer or other agent of the Trustees as shall
keep the said register for entry thereon.

SECTION 2.04 TRANSFER OF SHARES. Except as otherwise provided by the
Trustees, Shares shall be transferable on the records of the Trust only by the
record holder thereof or by his agent thereunto duly authorized in writing, upon
delivery to the Trustees or the Trust's transfer agent of a duly executed
instrument of transfer and such evidence of the genuineness of such execution
and authorization and of such other matters as may be required by the Trustees.
Upon such delivery the transfer shall be recorded on the register of the Trust.
Until such record is made, the Shareholder of record shall be deemed to be the
holder of such Shares for all purposes hereunder and neither the Trustees nor
the Trust, nor any transfer agent or registrar nor any officer, employee or
agent of the Trust shall be affected by any notice of the proposed transfer.

SECTION 2.05 TREASURY SHARES. Shares held in the treasury shall, until
reissued pursuant to Section 2.02 hereof, not confer any voting rights on the
Trustees, nor shall such Shares be entitled to any dividends or other
distributions declared with respect to the Shares.

SECTION 2.06 ESTABLISHMENT OF SERIES. The Trust created hereby shall
consist initially of three Series: Income and Growth Portfolio; Moderate Growth
Portfolio, and Growth Portfolio. Distinct records shall be maintained by the
Trust for each Series and the assets associated with each Series shall be held
and accounted for separately from the assets of the Trust or any other Series.
The Trustees shall have full power and authority, in their sole discretion and
without obtaining any prior authorization or vote of the Shareholders of any
Series, to establish and designate and to change in any manner any Series or any
classes of initial or additional Series and to fix such preferences, voting
powers, rights and privileges of such Series or classes thereof as the Trustees
may from time to time determine, to divide or combine the Shares or any Series
or classes thereof into a greater or lesser number, to classify or reclassify
any issued Shares or any

-3-
<PAGE>

Series or classes thereof into one or more Series or classes of Shares, and to
take such other action with respect to the Shares as the Trustees may deem
desirable. The establishment and designation of any Series (other than those
established pursuant to the first sentence of this Section 2.06) shall be
effective upon the adoption of a resolution by a majority of the Trustees
setting forth such establishment and designation and the relative rights and
preferences of the Shares of such Series. A Series may issue any number of
Shares, but need not issue Shares. At any time that there are no Shares
outstanding of any particular Series previously established and designated, the
Trustees may by a majority vote abolish that Series and the establishment and
designation thereof.

All references to Shares in this Trust Instrument shall be deemed to be
Shares of any or all Series, or classes thereof as the context may require. All
provisions herein relating to the Trust shall apply equally to each Series of
the Trust, and each class thereof, except as the context otherwise requires.

Each Share of a Series of the Trust shall represent an equal beneficial
interest in the net assets of such Series. Each holder of Shares of a Series
shall be entitled to receive his proportionate share of all distributions made
with respect to such Series, based upon the number of full and fractional Shares
of the Series held. Upon redemption of his Shares, such Shareholder shall be
paid solely out of the funds and property of such Series of the Trust.

SECTION 2.07 INVESTMENT IN THE TRUST. The Trustees shall accept
investments in any Series from such persons and on such terms as they may from
time to time authorize. At the Trustees' discretion, such investments, subject
to applicable law, may be in the form of cash or securities in which the
affected Series is authorized to invest, valued as provided in Article IX
Section 9.03 hereof. Investments in a Series shall be credited to each
Shareholder's account in the form of full and fractional Shares at the net asset
value per Share next determined after the investment is received or accepted as
may be determined by the Trustees; provided, however, that the Trustees may, in
their sole discretion, (a) fix minimum amounts for initial and subsequent
investments or (b) impose a sales charge upon investments in such manner and at
such time determined by the Trustees.

SECTION 2.08 ASSETS AND LIABILITIES OF SERIES. All consideration
received by the Trust for the issue or sale of Shares of a particular Series,
together with all assets in which such consideration is invested or reinvested,
all income, earnings, profits, and proceeds thereof including any proceeds
derived from the sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds in whatever form the
same may be, shall be held and accounted for separately from the other assets of
the Trust and of every other Series and may be referred to herein as "assets
belonging to" that Series. The assets belonging to a particular Series shall
belong to that Series for all purposes, and to no other Series, and shall be
subject only to the rights of creditors of that Series. In addition, any assets,
income, earnings, profits or funds, or payments and proceeds with respect
thereto, which are not readily identifiable as belonging to any particular
Series shall be allocated by the Trustees

-4-
<PAGE>

between and among one or more of the Series in such manner as the Trustees, in
their sole discretion, deem fair and equitable. Each such allocation shall be
conclusive and binding upon the Shareholders of all Series for all purposes, and
such assets, income, earnings, profits or funds, or payments and proceeds with
respect thereto shall be assets belonging to that Series. The assets belonging
to a particular Series shall be so recorded upon the books of the Trust, and
shall be held by the Trustees in trust for the benefit of the holders of Shares
of that Series. The assets belonging to each particular Series shall be charged
with the liabilities of that Series and all expenses, costs, charges and
reserves attributable to that Series. Any general liabilities, expenses, costs,
charges or reserves of the Trust which are not readily identifiable as belonging
to any particular Series shall be allocated and charged by the Trustees between
or among any one or more of the Series in such manner as the Trustees in their
sole discretion deem fair and equitable. Each such allocation shall be
conclusive and binding upon the Shareholders of all Series for all purposes.
Without limitation of the foregoing provisions of this Section 2.08, but subject
to the right of the Trustees in their discretion to allocate general
liabilities, expenses, costs, changes or reserves as herein provided, the debts,
liabilities, obligations and expenses incurred, contracted for or otherwise
existing with respect to a particular Series shall be enforceable against the
assets of such Series only, and not against the assets of the Trust generally.
Notice of this contractual limitation on inter-Series liabilities may, in the
Trustee's sole discretion, be set forth in the certificate of trust of the Trust
(whether originally or by amendment) as filed or to be filed in the Office of
the Secretary of State of the State of Delaware pursuant to the Delaware Act,
and upon the giving of such notice in the certificate of trust, the statutory
provisions of Section 3804 of the Delaware Act relating to limitations on
inter-Series liabilities (and the statutory effect under Section 3804 of setting
forth such notice in the certificate of trust) shall become applicable to the
Trust and each Series. Any person extending credit to, contracting with or
having any claim against any Series may look only to the assets of that Series
to satisfy or enforce any debt, with respect to that Series. No Shareholder or
former Shareholder of any Series shall have a claim on or any right to any
assets allocated or belonging to any other Series.

SECTION 2.09 NO PREEMPTIVE RIGHTS. Shareholders shall have no
preemptive or other right to subscribe to any additional Shares or other
securities issued by the Trust or the Trustees, whether of the same or other
Series.

SECTION 2.10 NO PERSONAL LIABILITY OF SHAREHOLDER. No Shareholder shall
be personally liable for the debts, liabilities, obligations and expenses
incurred by, contracted for, or otherwise existing with respect to, the Trust or
by or on behalf of any Series. The Trustees shall have no power to bind any
Shareholder personally or to call upon any Shareholder for the payment of any
sum of money or assessment whatsoever other than such as the Shareholder may at
any time personally agree to pay by way of subscription for any Shares or
otherwise.

-5-
<PAGE>

ARTICLE III
THE TRUSTEES

SECTION 3.01 MANAGEMENT OF THE TRUST. The Trustees shall have exclusive
and absolute control over the Trust Property and over the business of the Trust
to the same extent as if the Trustees were the sole owners of the Trust Property
and business in their own right, but with such powers of delegation as may be
permitted by this Trust Instrument. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its branches
and maintain offices both within and without the State of Delaware, in any and
all states of the United States of America, in the District of Columbia, in any
and all commonwealths, territories, dependencies, colonies, or possessions of
the United States of America, and in any foreign jurisdiction and to do all such
other things and execute all such instruments as they deem necessary, proper or
desirable in order to promote the interests of the Trust although such things
are not herein specifically mentioned. Any determination as to what is in the
interests of the Trust made by the Trustees in good faith shall be conclusive.
In construing the provisions of this Trust Instrument, the presumption shall be
in favor of a grant of power to the Trustees.

The enumeration of any specific power in this Trust Instrument shall
not be construed as limiting the aforesaid power. The powers of the Trustees may
be exercised without order of or resort to any court.

Except for the Trustees named herein or appointed to fill vacancies
pursuant to Section 3.04 of this Article III, the Trustees shall be elected by
the Shareholders owning of record a plurality of the Shares voting at a meeting
of Shareholders. Any Shareholder meeting held for such purpose shall be held on
a date fixed by the Trustees. In the event that less than a majority of the
Trustees holding office have been elected by Shareholders, the Trustees then in
office will call a Shareholders' meeting for the election of Trustees in
accordance with the provisions of the 1940 Act.

SECTION 3.02 INITIAL TRUSTEES. The initial Trustees shall be the
persons named herein.

SECTION 3.03 TERM OF OFFICE. The Trustees shall hold office during the
lifetime of this Trust, and until its termination as herein provided; except (a)
that any Trustee may resign his trust by written instrument signed by him and
delivered to the other Trustees, which shall take effect upon such delivery or
upon such later date as is specified therein; (b) that any Trustee may be
removed at any time by written instrument, signed by at least two-thirds of the
number of Trustees prior to such removal specifying the date when such removal
shall become effective; (c) that any Trustee who requests in writing to be
retired or who has died, becomes physically or mentally incapacitated by reason
of illness or otherwise, or is otherwise unable to serve, may be retired by
written instrument signed by a majority of the other Trustees, specifying the
date of his retirement; and (d) that a Trustee may be removed at any meeting of
the Shareholders of the Trust by a vote of Shareholders owning at least
two-thirds of the Outstanding Shares of the Trust.

-6-
<PAGE>

SECTION 3.04 VACANCIES AND APPOINTMENTS . In case of a Trustee's
declination to serve, death, resignation, retirement, removal, physical or
mental incapacity by reason of illness, disease or otherwise, or if a Trustee is
otherwise unable to serve, or if there is an increase in the number of Trustees,
a vacancy shall occur. Whenever a vacancy in the Board of Trustees shall occur,
until such vacancy is filled, the other Trustees shall have all the powers
hereunder and the certificate of the other Trustees of such vacancy shall be
conclusive. In the case of a vacancy, the remaining Trustees shall fill such
vacancy by appointing such other person as they in their discretion see fit, to
the extent consistent with the limitations provided under the 1940 Act. Such
appointment shall be evidenced by a written instrument signed by a majority of
the Trustees in office or by resolution of the Trustees, duly adopted, which
shall be recorded in the minutes of a meeting of the Trustees, whereupon the
appointment shall take effect.

An appointment of a Trustee may be made by the Trustees then in office
in anticipation of a vacancy to occur by reason of retirement, resignation or
increase in number of Trustees effective at a later date, provided that said
appointment shall become effective only at or after the effective date of said
retirement, resignation or increase in number of Trustees. As soon as any person
appointed as a Trustee pursuant to this Section 3.04 shall have accepted this
Trust, the trust estate shall vest in the new Trustee or Trustees, together with
the continuing Trustees, without any further act or conveyance, and such person
shall be deemed a Trustee.

SECTION 3.05 TEMPORARY ABSENCE . Any Trustee may, by power of attorney,
delegate his power for a period not exceeding six months at any time to any
other Trustee or Trustees, provided that in no case shall fewer than two
Trustees personally exercise the other powers hereunder except as herein
otherwise expressly provided.

SECTION 3.06 NUMBER OF TRUSTEES . The number of Trustees shall be at
least two (2), and thereafter shall be such number as shall be fixed from time
to time by a majority of the Trustees, provided, however, that the number of
Trustees shall in no event be more than twelve (12).

SECTION 3.07 EFFECT OF ENDING OF A TRUSTEE'S SERVICE. The declination
to serve, death, resignation, retirement, removal, incapacity, or inability of
the Trustees, or any one of them, shall not operate to terminate the Trust or to
revoke any existing agency created pursuant to the terms of this Trust
Instrument.

SECTION 3.08 OWNERSHIP OF ASSETS OF THE TRUST . The assets of the Trust
and of each Series shall be held separate and apart from any assets now or
hereafter held in any capacity other than as Trustee hereunder by the Trustees
or any successor Trustees. Legal title in all of the assets of the Trust and the
right to conduct any business shall at all times be considered as vested in the
Trustees on behalf of the Trust, except that the Trustees may cause legal title
to any Trust Property to be held by, or in the name of, the Trust or in the name
of any person as nominee. No Shareholder shall be deemed to have a severable
ownership in any individual asset of the

-7-
<PAGE>

Trust or of any Series or any right of partition or possession thereof but each
Shareholder shall have, except as otherwise provided for herein, a proportionate
undivided beneficial interest in the Trust or Series based upon the number of
Shares owned. The Shares shall be personal property giving only the rights
specifically set forth in this Trust Instrument.

ARTICLE IV
POWERS OF THE TRUSTEES

SECTION 4.01 POWERS. The Trustees in all instances shall act as
principals, and are and shall be free from the control of the Shareholders. The
Trustees shall have full power and authority to do any and all acts and to make
and execute any and all contracts and instruments that they may consider
necessary or appropriate in connection with the management of the Trust. The
Trustees shall not in any way be bound or limited by present or future laws or
customs in regard to trust investments, but shall have full authority and power
to make any and all investments which they, in their sole discretion, shall deem
proper to accomplish the purpose of this Trust without recourse to any court or
other authority. Subject to any applicable limitation in this Trust Instrument
or the Bylaws of the Trust, the Trustees shall have the power and authority:

(a) To invest and reinvest cash and other property (including
investment, notwithstanding any other provision hereof, of all of the assets of
any Series in a single open-end investment company, including investment by
means of transfer of such assets in exchange for an interest or interests in
such investment company), and to hold cash or other property of the Trust
uninvested, without in any event being bound or limited by any present or future
law or custom in regard to investments by trustees, and to sell, exchange, lend,
pledge, mortgage, hypothecate, write options on and lease any or all of the
assets of the Trust:

(b) To operate as and carry on the business of an investment company,
and exercise all the powers necessary and appropriate to the conduct of such
operations;

(c) To borrow money and in this connection issue notes or other
evidence of indebtedness; to secure borrowings by mortgaging, pledging or
otherwise subjecting as security the Trust Property; to endorse, guarantee, or
undertake the performance of an obligation or engagement of any other person and
to lend Trust Property;

(d) To provide for the distribution of interests of the Trust either
through a principal underwriter in the manner hereinafter provided for or by the
Trust itself, or both, or otherwise pursuant to a plan of distribution of any
kind;

(e) To adopt Bylaws not inconsistent with this Trust Instrument
providing for the conduct of the business of the Trust and to amend and repeal
them to the extent that they do not reserve that right to the Shareholders; such
Bylaws shall be deemed incorporated and included in this Trust Instrument;

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(f) To elect and remove such officers and appoint and terminate such
agents as they consider appropriate;

(g) To employ one or more banks, trust companies or companies that are
members of a national securities exchange or such other entities as the
Commission may permit as custodians of any assets of the Trust subject to any
conditions set forth in this Trust Instrument or in the Bylaws;

(h) To retain one or more transfer agents and shareholder servicing
agents, or both;

(i) To set record dates in the manner provided herein or in the Bylaws;

(j) To delegate such authority as they consider desirable to any
officers of the Trust and to any investment adviser, manager, custodian,
underwriter or other agent or independent contractor;

(k) To sell or exchange any or all of the assets of the Trust, subject
to the provisions of Article XI, subsection 11.04(b) hereof;

(l) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property, and to execute and deliver
powers of attorney to such person or persons as the Trustees shall deem proper,
granting to such person or persons such power and discretion with relation to
securities or property as the Trustees shall deem proper;

(m) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities;

(n) To hold any security or property in a form not indicating any
trust, whether in bearer, book entry, unregistered or other negotiable form; or
either in the name of the Trust or in the name of a custodian or a nominee or
nominees, subject in either case to proper safeguards according to the usual
practice of Delaware business trusts or investment companies;

(o) To establish separate and distinct Series with separately defined
investment objectives and policies and distinct investment purposes in
accordance with the provisions of Article II hereof and to establish classes of
such Series having relative rights, powers and duties as they may provide
consistent with applicable law;

(p) Subject to the provisions of Section 3804 of the Delaware Act, to
allocate assets, liabilities and expenses of the Trust to a particular Series or
to apportion the same between or among two or more Series, provided that any
liabilities or expenses incurred by a particular Series shall be payable solely
out of the assets belonging to that Series as provided for in Article II hereof;

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(q) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern, any security of which is
held in the Trust; to consent to any contract, lease, mortgage, purchase, or
sale of property by such corporation or concern, and to pay calls or
subscriptions with respect to any security held in the Trust;

(r) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust or any matter in controversy including, but not limited to,
claims for taxes;

(s) To make distributions of income and of capital gains to
Shareholders in the manner provided herein;

(t) To establish, from time to time, a minimum investment for
Shareholders in the Trust or in one or more Series or class, and to require the
redemption of the Shares of any Shareholders whose investment is less than such
minimum upon giving notice to such Shareholder;

(u) To establish one or more committees, to delegate any of the powers
of the Trustees to said committees and to adopt a committee charter providing
for such responsibilities, membership (including Trustees, officers or other
agents of the Trust therein) and any other characteristics of said committees as
the Trustees may deem proper. Notwithstanding the provisions of this Article IV,
and in addition to such provisions or any other provision of this Trust
Instrument or of the Bylaws, the Trustees may by resolution appoint a committee
consisting of less than the whole number of Trustees then in office, which
committee may be empowered to act for and bind the Trustees and the Trust, as if
the acts of such committee were the acts of all the Trustees then in office,
with respect to the institution, prosecution, dismissal, settlement, review or
investigation of any action, suit or proceeding which shall be pending or
threatened to be brought before any court, administrative agency or other
adjudicatory body;

(v) To interpret the investment policies, practices or limitations of
any Series;

(w) To establish a registered office and have a registered agent in the
state of Delaware; and

(x) In general to carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary, suitable
or proper for the accomplishment of any purpose or the attainment of any object
or the furtherance of any power hereinbefore set forth, either alone or in
association with others, and to do every other act or thing incidental or
appurtenant to or growing out of or connected with the aforesaid business or
purposes, objects or powers.

The foregoing clauses shall be construed as objects and powers, and the
foregoing enumeration of specific powers shall not be held to limit or restrict
in any manner the general powers of the Trustees. Any action by one or more of
the Trustees in their capacity as such

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hereunder shall be deemed an action on behalf of the Trust or the applicable
Series, and not an action in an individual capacity.

The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust.

No one dealing with the Trustees shall be under any obligation to make
any inquiry concerning the authority of the Trustees, or to see the application
of any payments made or property transferred to the Trustees or upon their
order.

SECTION 4.02 The Trustees shall have the power to issue, sell,
repurchase, redeem, retire, cancel, acquire, hold, resell, reissue, dispose of
and otherwise deal in Shares and, subject to the provisions set forth in Article
II and Article IX, to apply to any such repurchase, redemption, retirement,
cancellation or acquisition of Shares any funds or property of the Trust, or the
particular Series of the Trust, with respect to which such Shares are issued.

SECTION 4.03 TRUSTEES AND OFFICERS AS SHAREHOLDERS. Any Trustee,
officer or other agent of the Trust may acquire, own and dispose of Shares to
the same extent as if he were not a Trustee, officer or agent; and the Trustees
may issue and sell or cause to be issued and sold Shares to and buy such Shares
from any such person or any firm or company in which he is interested, subject
only to the general limitations herein contained as to the sale and purchase of
such Shares; and all subject to any restrictions which may be contained in the
Bylaws.

SECTION 4.04 ACTION BY THE TRUSTEES. In any action taken by the
Trustees hereunder, unless otherwise specified, the Trustees shall act by
majority vote at a meeting duly called or by unanimous written consent without a
meeting or by telephone meeting provided a quorum of Trustees participate in any
such telephone meeting, unless the 1940 Act requires that a particular action be
taken only at a meeting at which the Trustees are present in person. At any
meeting of the Trustees, a majority of the Trustees shall constitute a quorum.
Meetings of the Trustees may be called orally or in writing by the Chairman of
the Board of Trustees or by any two other Trustees. Notice of the time, date and
place of all meetings of the Trustees shall be given by the person calling the
meeting to each Trustee by telephone, facsimile or other electronic mechanism
sent to his home or business address at least twenty-four hours in advance of
the meeting or by written notice mailed to his home or business address at least
seventy-two hours in advance of the meeting. Notice need not be given to any
Trustee who attends the meeting without objecting to the lack of notice or who
executes a written waiver of notice with respect to the meeting. Any meeting
conducted by telephone shall be deemed to take place at the principal office of
the Trust, as determined by the Bylaws or by the Trustees. Subject to the
requirements of the 1940 Act, the Trustees by majority vote may delegate to any
one or more of their number their authority to approve particular matters or
take particular actions on behalf of the Trust. Written consents or waivers of
the Trustees may be executed in one or more counterparts. Execution of a written
consent or waiver and delivery thereof to the Trust may be accomplished by
facsimile or other

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similar electronic mechanism.

SECTION 4.05 CHAIRMAN OF THE BOARD OF TRUSTEEESS. The Trustees shall
appoint one of their number to be Chairman of the Board of Trustees. The
Chairman shall preside at all meetings of the Trustees, shall be responsible for
the execution of policies established by the Trustees and the administration of
the Trust, and may be (but is not required to be) the chief executive, financial
and/or accounting officer of the Trust.

SECTION 4.06 PRINCIPAL TRANSACTIONS Except to the extent prohibited by
applicable law, the Trustees may, on behalf of the Trust, buy any securities
from or sell any securities to, or lend any assets of the Trust to, any Trustee
or officer of the Trust or any firm of which any such Trustee or officer is a
member acting as principal, or have any such dealings with any investment
adviser, administrator, distributor or transfer agent for the Trust or with any
interested person of such person; and the Trust may employ any such person, or
firm or company in which such person is an interested person, as broker, legal
counsel, registrar, investment adviser, administrator, distributor, transfer
agent, dividend disbursing agent, custodian or in any other capacity upon
customary terms.

ARTICLE V
EXPENSES OF THE TRUST

Subject to the provisions of Article II, Section 2.08 hereof, the
Trustees shall be reimbursed from the Trust estate or the assets belonging to
the appropriate Series for their expenses and disbursements, including, without
limitation, interest charges, taxes, brokerage fees and commissions; expenses of
issue, repurchase and redemption of Shares; certain insurance premiums;
applicable fees, interest charges and expenses of third parties, including the
Trust's investment advisers, managers, administrators, distributors, custodians,
transfer agent and fund accountant; fees of pricing, interest, dividend, credit
and other reporting services; costs of membership in trade associations;
telecommunications expenses; funds transmission expenses; auditing, legal and
compliance expenses; costs of forming the Trust and maintaining its existence;
costs of preparing and printing the Trust's prospectuses, statements of
additional information and shareholder reports and delivering them to existing
Shareholders; expenses of meetings of Shareholders and proxy solicitations
therefor; costs of maintaining books and accounts; costs of reproduction,
stationery and supplies; fees and expenses of the Trustees; compensation of the
Trust's officers and employees and costs of other personnel performing services
for the Trust; costs of Trustee meetings; Commission registration fees and
related expenses; state or foreign securities laws registration fees and related
expenses and for such non-recurring items as may arise, including litigation to
which the Trust (or a Trustee acting as such) is a party, and for all losses and
liabilities by them incurred in administering the Trust, and for the payment of
such expenses, disbursements, losses and liabilities the Trustees shall have a
lien on the assets belonging to the appropriate Series, or in the case of an
expense allocable to more than one Series, on the assets of each such Series,
prior to any rights or interests of the Shareholders thereto. This section

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shall not preclude the Trust from directly paying any of the aforementioned fees
and expenses.

ARTICLE VI
INVESTMENT ADVISER, PRINCIPAL UNDERWRITER,
ADMINISTRATOR AND TRANSFER AGENT

SECTION 6.01 INVESTMENT ADVISER.

(a) The Trustees may in their discretion, from time to time, enter into
an investment advisory contract or contracts with respect to the Trust or any
Series whereby the other party or parties to such contract or contracts shall
undertake to furnish the Trustees with such investment advisory, statistical and
research facilities and services and such other facilities and services, if any,
all upon such terms and conditions (including any Shareholder vote) that may be
required under the 1940 Act, as may be prescribed in the Bylaws, or as the
Trustees may in their discretion determine (such terms and conditions not to be
inconsistent with the provisions of this Trust Instrument or of the Bylaws).
Notwithstanding any other provision of this Trust Instrument, the Trustees may
authorize any investment adviser (subject to such general or specific
instructions as the Trustees may from time to time adopt) to effect purchases,
sales or exchanges of portfolio securities, other investment instruments of the
Trust, or other Trust Property on behalf of the Trustees, or may authorize any
officer, agent, or Trustee to effect such purchases, sales or exchanges pursuant
to recommendations of the investment adviser (and all without further action by
the Trustees). Any such purchases, sales and exchanges shall be deemed to have
been authorized by all of the Trustees.

(b) The Trustees may authorize the investment adviser to employ, from
time to time, one or more sub-advisers to perform such of the acts and services
of the investment adviser, and upon such terms and conditions, as may be agreed
upon between the investment adviser and subadviser (such terms and conditions
not to be inconsistent with the provisions of this Trust Instrument or of the
Bylaws). Any reference in this Trust Instrument to the investment adviser shall
be deemed to include such sub-advisers, unless the context otherwise requires;
provided that no Shareholder approval shall be required with respect to any
sub-adviser unless required under the 1940 Act or other law, contract or order
applicable to the Trust.

SECTION 6.02 PRINCIPAL UNDERWRITER. The Trustees may in their
discretion from time to time enter into an exclusive or non-exclusive
underwriting contract or contracts providing for the sale of Shares, whereby the
Trust may either agree to sell Shares to the other party to the contract or
appoint such other party its sales agent for such Shares. In either case, the
contract shall be on such terms and conditions as may be prescribed in the
Bylaws and as the Trustees may in their discretion determine (such terms and
conditions not to be inconsistent with the provisions of this Trust Instrument
or of the Bylaws); and such contract may also provide for the repurchase or sale
of Shares by such other party as principal or as agent of the Trust.

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SECTION 6.03 ADMINISTRATION. The Trustees may in their discretion from
time to time enter into one or more management or administrative contracts
whereby the other party or parties shall undertake to furnish the Trustees with
management or administrative services. The contract or contracts shall be on
such terms and conditions as may be prescribed in the Bylaws and as the Trustees
may in their discretion determine (such terms and conditions not to be
inconsistent with the provisions of this Trust Instrument or of the Bylaws).

SECTION 6.04 TRANSFER AGENT. The Trustees may in their discretion from
time to time enter into one or more transfer agency and shareholder service
contracts whereby the other party or parties shall undertake to furnish the
Trustees with transfer agency and shareholder services. The contract or
contracts shall be on such terms and conditions as may be prescribed in the
Bylaws and as the Trustees may in their discretion determine (such terms and
conditions not to be inconsistent with the provisions of this Trust Instrument
or of the Bylaws).

SECTION 6.05 PARTIES TO CONTRACT. Any contract of the character
described in Sections 6.01, 6.02, 6.03 and 6.04 of this Article VI or any
contract of the character described in Article VIII hereof may be entered into
with any corporation, firm, partnership, trust or association, although one or
more of the Trustees or officers of the Trust may be an officer, director,
trustee, shareholder, or member of such other party to the contract, and no such
contract shall be invalidated or rendered void or voidable by reason of the
existence of any relationship, nor shall any person holding such relationship be
disqualified from voting on or executing the same in his capacity as Shareholder
and/or Trustee, nor shall any person holding such relationship be liable merely
by reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was not
inconsistent with the provisions of this Article VI or Article VIII hereof or of
the Bylaws. The same person (including a corporation, firm, partnership, trust,
or association) may be the other party to contracts entered into pursuant to
Sections 6.01, 6.02, 6.03 and 6.04 of this Article VI or pursuant to Article
VIII hereof and any individual may be financially interested or otherwise
affiliated with persons who are parties to any or all of the contracts mentioned
in this Section 6.05.

SECTION 6.06 PROVISIONS AND AMENDMENTS. Any contract entered into
pursuant to Section 6.01 or 6.02 of this Article VI shall be consistent with and
subject to the requirements of Section 15 of the 1940 Act, if applicable, or
other applicable Act of Congress hereafter enacted with respect to its
continuance in effect, its termination, and the method of authorization and
approval of such contract or renewal thereof, and no amendment to any contract
entered into pursuant to Section 6.01 or 6.02 of this Article VI shall be
effective unless assented to in a manner consistent with the requirements of
said Section 15, as modified by any applicable rule, regulation or order of the
Commission.

ARTICLE VII
SHAREHOLDERS' VOTING POWERS AND MEETINGS

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SECTION 7.01 VOTING POWERS.

(a) The Shareholders shall have power to vote only (a) for the election
of Trustees to the extent provided in Article III, Section 3.01 hereof, (b) for
the removal of Trustees to the extent provided in Article III, Section 3.03(d)
hereof, (c) with respect to any investment advisory contract to the extent
provided in Article VI, Section 6.01 hereof, (d) with respect to an amendment of
this Trust Instrument, to the extent provided in Article XI, Section 11.08, and
(e) with respect to such additional matters relating to the Trust as may be
required by law, by this Trust Instrument, or any registration of the Trust with
the Commission or any State, or as the Trustees may consider desirable.

(b) Notwithstanding paragraph (a) of this Section 7.01 or any other
provision of this Trust Instrument (including the Bylaws) which would by its
terms provide for or require a vote of Shareholders, the Trustees may take
action without a Shareholder vote if (i) the Trustees shall have obtained an
opinion of counsel that a vote or approval of such action by Shareholders is not
required under (A) the 1940 Act or any other applicable laws, or (B) any
registrations, undertakings or agreements of the Trust known to such counsel,
and the taking of such action without a Shareholder vote would be consistent
with the best interests of the Shareholders.

(c) On any matter submitted to a vote of the Shareholders, all Shares
shall be voted separately by individual Series, and whenever the Trustees
determine that the matter affects only certain Series, may be submitted for a
vote by only such Series, except (i) when required by the 1940 Act, Shares shall
be voted in the aggregate and not by individual Series; and (ii) when the
Trustees have determined that the matter affects the interests of more than one
Series and that voting by shareholders of all Series would be consistent with
the 1940 Act, then the Shareholders of all such Series shall be entitled to vote
thereon (either by individual Series or by Shares voted in the aggregate, as the
Trustees in their discretion may determine). The Trustees may also determine
that a matter affects only the interests of one or more classes of a Series, in
which case (or if required under the 1940 Act) such matter shall be voted on by
such class or classes. Each whole Share shall be entitled to one vote as to any
matter on which it is entitled to vote, and each fractional Share shall be
entitled to a proportionate fractional vote. There shall be no cumulative voting
in the election of Trustees. Shares may be voted in person or by proxy or in any
manner provided for in the Bylaws. A proxy may be given in writing. The Bylaws
may provide that proxies may also, or may instead, be given by any electronic or
telecommunications device or in any other manner. Notwithstanding anything else
herein or in the Bylaws, in the event a proposal by anyone other than the
officers or Trustees of the Trust is submitted to a vote of the Shareholders, or
in the event of any proxy contest or proxy solicitation or proposal in
opposition to any proposal by the officers or Trustees of the Trust, Shares may
be voted only in person or by written proxy. Until Shares are issued, the
Trustees may exercise all rights of Shareholders and may take any action
required or permitted by law, this Trust Instrument or any of the Bylaws of the
Trust to be taken by Shareholders.

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SECTION 7.02 MEETINGS. Meetings may be held within or without the State
of Delaware. Special meetings of the Shareholders of any Series may be called by
the Trustees and shall be called by the Trustees upon the written request of
Shareholders owning at least one tenth of the Outstanding Shares of the Trust
entitled to vote. Whenever ten or more Shareholders meeting the qualifications
set forth in Section 16(c) of the 1940 Act, as the same may be amended from time
to time, seek the opportunity of furnishing materials to the other Shareholders
with a view to obtaining signatures on such a request for a meeting, the
Trustees shall comply with the provisions of said Section 16(c) with respect to
providing such Shareholders access to the list of the Shareholders of record of
the Trust or the mailing of such materials to such Shareholders of record,
subject to any rights provided to the Trust or any Trustees provided by said
Section 16(c). Notice shall be sent, by First Class Mail or such other means
determined by the Trustees, at least 10 days prior to any such meeting.
Notwithstanding anything to the contrary in this Section 7.02, the Trustees
shall not be required to call a special meeting of the Shareholders of any
Series or to provide Shareholders seeking the opportunity of furnishing the
materials to other Shareholders with a view to obtaining signatures on a request
for a meeting except to the extent required under the 1940 Act.

SECTION 7.03 QUORUM AND REQUIRED VOTE. One-third of Shares outstanding
and entitled to vote in person or by proxy as of the record date for a
Shareholders' meeting shall be a quorum for the transaction of business at such
Shareholders' meeting, except that where any provision of law or of this Trust
Instrument permits or requires that holders of any Series shall vote as a Series
(or that holders of a class shall vote as a class), then one-third of the
aggregate number of Shares of that Series (or that class) entitled to vote shall
be necessary to constitute a quorum for the transaction of business by that
Series (or that class). Any meeting of Shareholders may be adjourned from time
to time by a majority of the votes properly cast upon the question of adjourning
a meeting to another date and time, whether or not a quorum is present. Any
adjourned session or sessions may be held, within a reasonable time after the
date set for the original meeting, without the necessity of further notice.
Except when a larger vote is required by law or by any provision of this Trust
Instrument or the Bylaws, a majority of the Shares voted in person or by proxy
shall decide any questions and a plurality shall elect a Trustee, provided that
where any provision of law or of this Trust Instrument permits or requires that
the holders of any Series shall vote as a Series (or that the holders of any
class shall vote as a class), then a majority of the Shares present in person or
by proxy of that Series (or class), voted on the matter in person or by proxy
shall decide that matter insofar as that Series (or class) is concerned.
Shareholders may act by unanimous written consent, to the extent not
inconsistent with the 1940 Act, and any such actions taken by a Series (or
class) may be consented to unanimously in writing by Shareholders of that Series
(or class).

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ARTICLE VIII
CUSTODIAN

SECTION 8.01 APPOINTMENT AND DUTIES. The Trustees shall employ a bank,
a company that is a member of a national securities exchange, or a trust
company, that in each case shall have capital, surplus and undivided profits of
at least twenty million dollars ($20,000,000) and that is a member of the
Depository Trust Company (or such other person or entity as may be permitted to
act as custodian of the Trust's assets under the 1940 Act) as custodian with
authority as its agent, but subject to such restrictions, limitations and other
requirements, if any, as may be contained in the Bylaws of the Trust: (a) to
hold the securities owned by the Trust and deliver the same upon written order
or oral order confirmed in writing; (b) to receive and receipt for any moneys
due to the Trust and deposit the same in its own banking department or elsewhere
as the Trustees may direct; and (c) to disburse such funds upon orders or
vouchers.

The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of the
custodian, and upon such terms and conditions, as may be agreed upon between the
custodian and such sub-custodian and approved by the Trustees, provided that in
every case such sub-custodian shall be a bank, a company that is a member of a
national securities exchange, or a trust company organized under the laws of the
United States or one of the states thereof and having capital, surplus and
undivided profits of at least twenty million dollars ($20,000,000) and that is a
member of the Depository Trust Company or such other person or entity as may be
permitted by the Commission or is otherwise able to act as custodian of the
Trust's assets in accordance with the 1940 Act.

SECTION 8.02 CENTRAL CERTIFICATE SYSTEM. Subject to the 1940 Act and
such other rules, regulations and orders as the Commission may adopt, the
Trustees may direct the custodian to deposit all or any part of the securities
owned by the Trust in a system for the central handling of securities
established by a national securities exchange or a national securities
association registered with the Commission under the Securities Exchange Act of
1934, as amended, or such other person as may be permitted by the Commission, or
otherwise in accordance with the 1940 Act, pursuant to which system all
securities of any particular class or series of any issuer deposited within the
system are treated as fungible and may be transferred or pledged by bookkeeping
entry without physical delivery of such securities, provided that all such
deposits shall be subject to withdrawal only upon the order of the Trust or its
custodians, sub-custodians or other agents.

ARTICLE IX
DISTRIBUTIONS AND REDEMPTIONS

SECTION 9.01 DISTRIBUTIONS

(a) The Trustees may from time to time declare and pay dividends or
other

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distributions with respect to any Series and/or class of a Series. The amount of
such dividends or distributions and the payment of them and whether they are in
cash or any other Trust Property shall be wholly in the discretion of the
Trustees.

(b) Dividends and other distributions may be paid or made to the
Shareholders of record at the time of declaring a dividend or other distribution
or among the Shareholders of record at such other date or time or dates or times
as the Trustees shall determine, which dividends or distributions, at the
election of the Trustees, may be paid pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Trustees may
determine. The Trustees may adopt and offer to Shareholders such dividend
reinvestment plans, cash dividend payout plans or related plans as the Trustees
shall deem appropriate.

(c) Anything in this Trust Instrument to the contrary notwithstanding,
the Trustees may at any time declare and distribute a stock dividend to the
Shareholders of a particular Series, or class thereof, as of the record date of
that Series fixed as provided in Subsection 9.01(b) hereof.

SECTION 9.02 REDEMPTIONS. In case any holder of record of Shares of a
particular Series desires to dispose of his Shares or any portion thereof he may
deposit at the office of the transfer agent or other authorized agent of that
Series a written request or such other form of request as the Trustees may from
time to time authorize, requesting that the Series purchase the Shares in
accordance with this Section 9.02; and, subject to Section 9.04 hereof, the
Shareholder so requesting shall be entitled to require the Series to purchase,
and the Series or the principal underwriter of the Series shall purchase his
said Shares, but only at the Net Asset Value thereof (as described in Section
9.03 of this Article IX). The Series shall make payment for any such Shares to
be redeemed, as aforesaid, in cash or property from the assets of that Series
and, subject to Section 9.04 hereof, payment for such Shares shall be made by
the Series or the principal underwriter of the Series to the Shareholder of
record within seven (7) days after the date upon which the request is effective.
Upon redemption, shares shall become Treasury shares and may be re-issued from
time to time.

SECTION 9.03 DETERMINATION OF NET ASSET VALUE AND VALUATION OF
PORTFOLIO ASSETS. The term "Net Asset Value" of any Series shall mean that
amount by which the assets of that Series exceed its liabilities, all as
determined by or under the direction of the Trustees. The Trustees may delegate
any of their powers and duties under this Section 9.03 with respect to valuation
of assets and liabilities. Such value shall be determined separately for each
Series and shall be determined on such days and at such times as the Trustees
may determine. Such determination shall be made with respect to securities for
which market quotations are readily available, at the market value of such
securities; and with respect to other securities and assets, at the fair value
as determined in good faith by the Trustees; provided, however, that the
Trustees, without Shareholder approval, may alter the method of valuing
portfolio securities insofar as permitted under the 1940 Act. The resulting
amount, which shall represent the total Net Asset Value of the particular
Series, shall be divided by the total number of shares of that Series
outstanding at the time and the quotient so obtained shall be the Net Asset
Value per Share of that Series. At any time the Trustees may cause

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the Net Asset Value per Share last determined to be determined again in similar
manner and may fix the time when such redetermined value shall become effective.

The Trustees shall not be required to adopt, but may at any time adopt,
discontinue or amend a practice of seeking to maintain the Net Asset Value per
Share of the Series at a constant amount. If, for any reason, the net income of
any Series, determined at any time, is a negative amount, the Trustees shall
have the power with respect to that Series (a) to offset each Shareholder's pro
rata share of such negative amount from the accrued dividend account of such
Shareholder, (b) to reduce the number of Outstanding Shares of such Series by
reducing the number of Shares in the account of each Shareholder by a pro rata
portion of that number of full and fractional Shares which represents the amount
of such excess negative net income, (c) to cause to be recorded on the books of
such Series an asset account in the amount of such negative net income (provided
that the same shall thereupon become the property of such Series with respect to
such Series and shall not be paid to any Shareholder), which account may be
reduced by the amount of dividends declared thereafter upon the Outstanding
Shares of such Series on the day such negative net income is experienced, until
such asset account is reduced to zero; (d) to combine the methods described in
clauses (a) and (b) and (c) of this sentence; or (e) to take any other action
they deem appropriate, in order to cause (or in order to assist in causing) the
Net Asset Value per Share of such Series to remain at a constant amount per
Outstanding Share immediately after each such determination and declaration. The
Trustees shall also have the power not to declare a dividend out of net income
for the purpose of causing the Net Asset Value per Share to be increased.

In the event that any Series is divided into classes, the provisions of
this Section 9.03, to the extent applicable as determined in the discretion of
the Trustees and consistent with the 1940 Act and other applicable law, may be
equally applied to each such class.

SECTION 9.04 SUSPENSION OF THE RIGHT OF REDEMPTION. The Trustees may
declare a suspension of the right of redemption or postpone the date of payment
if permitted under the 1940 Act. Such suspension shall take effect at such time
as the Trustees shall specify but not later than the close of business on the
business day next following the declaration of suspension, and thereafter there
shall be no right of redemption or payment until the Trustees shall declare the
suspension at an end. In the case of a suspension of the right of redemption, a
Shareholder may either withdraw his request for redemption or receive payment
based on the Net Asset Value per Share next determined after the termination of
the suspension.

SECTION 9.05 REDEMPTION OF SHARES IN ORDER TO QUALIFY AS REGULATED
INVESTMENT COMPANY. If the Trustees shall, at any time and in good faith, be of
the opinion that direct or indirect ownership of Shares of any Series has or may
become concentrated in any Person to an extent which would disqualify any Series
as a regulated investment company under the Internal Revenue Code, then the
Trustees shall have the power (but not the obligation) by lot or other means
deemed equitable by them (a) to call for redemption by any such person of a
number, or principal amount, of Shares sufficient to maintain or bring the
direct or indirect ownership of

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Shares into conformity with the requirements for such qualification and (b) to
refuse to transfer or issue Shares to any person whose acquisition of Shares in
question would result in such disqualification. The redemption shall be effected
at the redemption price and in the manner provided in this Article IX.

The holders of Shares shall upon demand disclose to the Trustees in
writing such information with respect to direct and indirect ownership of Shares
as the Trustees deem necessary to comply with the requirements of any taxing
authority or this Section 9.05.

ARTICLE X
LIMITATION OF LIABILITY AND INDEMNIFICATION

SECTION 10.1 LIMITATION OF LIABILITY. Neither a Trustee nor an officer
of the Trust, when acting in such capacity, shall be personally liable to any
person other than the Trust or the Shareholders for any act, omission or
obligation of the Trust, any Trustee or any officer of the Trust. Neither a
Trustee nor an officer of the Trust shall be liable for any act or omission or
any conduct whatsoever in his capacity as Trustee or as an officer of the Trust,
provided that nothing contained herein or in the Delaware Act shall protect any
Trustee or any officer of the Trust against any liability to the Trust or to
Shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee or officer of the Trust
hereunder.

SECTION 10.02 INDEMNIFICATION.

(a) Subject to the exceptions and limitations contained in Subsection
10.02(b):

(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as a "Covered Person") shall be
indemnified by the Trust to the fullest extent permitted by law
against liability and against all expenses reasonably incurred or paid
by him in connection with any claim, action, suit or proceeding in
which he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts paid or
incurred by him in the settlement thereof;

(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal or
other, including appeals), actual or threatened while in office or
thereafter, and the words "liability" and "expenses" shall include,
without limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.

(b) No indemnification shall be provided hereunder to a Covered Person:

(i) who shall have been adjudicated by a court or body before
which the

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proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office or (B) not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust; or

(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office, (A) by the court or
other body approving the settlement; (B) by at least a majority of
those Trustees who are neither interested persons of the Trust nor are
parties to the matter based upon a review of readily available facts
(as opposed to a full trial-type inquiry); or (C) by written opinion
of independent legal counsel based upon a review of readily available
facts (as opposed to a full trial-type inquiry).

(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled, shall continue as to a person who has ceased to be a
Covered Person and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Covered Persons,
and other persons may be entitled by contract or otherwise under law.

(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described in
Subsection (a) of this Section 10.02 may be paid by the Trust or Series from
time to time prior to final disposition thereof upon receipt of an undertaking
by or on behalf of such Covered Person that such amount will be paid over by him
to the Trust or Series if it is ultimately determined that he is not entitled to
indemnification under this Section 10.02; provided, however, that either (i)
such Covered Person shall have provided appropriate security for such
undertaking, (ii) the Trust is insured against losses arising out of any such
advance payments or (iii) either a majority of the Trustees who are neither
interested persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered Person will be
found entitled to indemnification under this Section 10.02.

SECTION 10.03 SHAREHOLDERS. In case any Shareholder of any Series shall
be held to be personally liable solely by reason of his being or having been a
Shareholder of such Series and not because of his acts or omissions or for some
other reason, the Shareholder or former Shareholder (or his heirs, executors,
administrators or other legal representatives, or, in the case of a corporation
or other entity, its corporate or other general successor) shall be entitled out
of the assets belonging to the applicable Series to be held harmless from and
indemnified against all loss and expense arising from such liability. The Trust,
on behalf of the affected Series, shall, upon request by the Shareholder, assume
the defense of any claim made against the Shareholder for any

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act or obligation of the Series and satisfy any judgment thereon from the assets
of the Series.

ARTICLE XI
MISCELLANEOUS

SECTION 11.01 TRUST NOT A PARTNERSHIP. It is hereby expressly declared
that a trust and not a partnership is created hereby. No Trustee hereunder shall
have any power to bind personally either the Trust officers or any Shareholder.
All persons extending credit to, contracting with or having any claim against
the Trust or the Trustees shall look only to the assets of the appropriate
Series or (if the Trustees shall have yet to have established Series) of the
Trust for payment under such credit, contract or claim; and neither the
Shareholders nor the Trustees, nor any of their agents, whether past, present or
future, shall be personally liable therefor. Nothing in this Trust Instrument
shall protect a Trustee against any liability to which the Trustee would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office of Trustee hereunder.

SECTION 11.02 TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR
SURETY. The exercise by the Trustees or the officers of the Trust of their
powers and discretion hereunder in good faith and with reasonable care under the
circumstances then prevailing shall be binding upon everyone interested. Subject
to the provisions of Article X hereof and to Section 11.01 of this Article XI,
the Trustees and the officers of the Trust shall not be liable for errors of
judgment or mistakes of fact or law. The Trustees and the officers of the Trust
may take advice of counsel or other experts with respect to the meaning and
operation of this Trust Instrument, and subject to the provisions of Article X
hereof and Section 11.01 of this Article XI, shall be under no liability for any
act or omission in accordance with such advice or for failing to follow such
advice. The Trustees and the officers of the Trust shall not be required to give
any bond as such, nor any surety if a bond is obtained.

SECTION 11.03 ESTABLISHMENT OF RECORD DATES. The Trustees may close the
Share transfer books of the Trust for a period not exceeding ninety (90) days
preceding the date of any meeting of Shareholders, or the date for the payment
of any dividends or other distributions, or the date for the allotment of
rights, or the date when any change or conversion or exchange of Shares shall go
into effect; or in lieu of closing the stock transfer books as aforesaid, the
Trustees may fix in advance a date, not exceeding ninety (90) days preceding the
date of any meeting of Shareholders, or the date for payment of any dividend or
other distribution, or the date for the allotment of rights, or the date when
any change or conversion or exchange of Shares shall go into effect, as a record
date for the determination of the Shareholders entitled to notice of, and to
vote at, any such meeting, or entitled to receive payment of any such dividend
or other distribution, or to any such allotment of rights, or to exercise the
rights in respect of any such change, conversion or exchange of Shares, and in
such case such Shareholders and only such Shareholders as shall be Shareholders
of record on the date so fixed shall be entitled to such notice of, and to vote
at, such meeting, or to receive payment of such dividend or other distribution,
or to receive such allotment

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or rights, or to exercise such rights, as the case may be, notwithstanding any
transfer of any Shares on the books of the Trust after any such record date
fixed as aforesaid.

SECTION 11.04 TERMINATION OF TRUST.

(a) This Trust shall continue without limitation of time but subject to
the provisions of Subsection 11.04(b).

(b) The Trustees may, subject to any necessary Shareholder, Trustee,
and regulatory approvals:

(i) sell and convey all or substantially all of the assets of the
Trust or any affected Series to another trust, partnership,
association or corporation, or to a separate series of shares thereof,
organized under the laws of any state which trust, partnership,
association or corporation is an open-end management investment
company as defined in the 1940 Act, or is a series thereof, for
adequate consideration which may include the assumption of all
outstanding obligations, taxes and other liabilities, accrued or
contingent, of the Trust or any affected Series, and which may include
shares of beneficial interest, stock or other ownership interests of
such trust, partnership, association or corporation or of a series
thereof;

(ii) enter into a plan of liquidation in order to terminate and
liquidate any Series (or class) of the Trust, or the Trust; or

(iii) at any time sell and convert into money all of the assets
of the Trust or any affected Series.

Upon making reasonable provision, in the determination of the Trustees, for the
payment of all liabilities by assumption or otherwise, the Trustees shall
distribute the remaining proceeds or assets (as the case may be) of each Series
(or class) ratably among the holders of Shares of the affected Series, based
upon the ratio that each Shareholder's Shares bears to the number of Shares of
such Series (or class) then outstanding.

(c) Upon completion of the distribution of the remaining proceeds or
the remaining assets as provided in Subsection 11.04(b), the Trust or any
affected Series shall terminate and the Trustees and the Trust shall be
discharged of any and all further liabilities and duties hereunder and the
right, title and interest of all parties with respect to the Trust or Series
shall be cancelled and discharged.

Upon termination of the Trust, following completion of winding up of
its business, the Trustees shall cause a certificate of cancellation of the
Trust's certificate of trust to be filed in accordance with the Delaware Act,
which certificate of cancellation may be signed by any one Trustee.

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<PAGE>

SECTION 11.05 REORGANIZATION.

(a) Notwithstanding anything else herein, the Trustees, in order to
change the form or jurisdiction of organization of the Trust, may (i) cause the
Trust to merge or consolidate with or into one or more trusts, partnerships
(general or limited), associations or corporations so long as the surviving or
resulting entity is an open-end management investment company under the 1940
Act, or is a series thereof, that will succeed to or assume the Trust's
registration under that Act and which is formed, organized or existing under the
laws of a state, commonwealth, possession or colony of the United States or (ii)
cause the Trust to incorporate under the laws of Delaware.

(b) The Trustees may, subject to a vote of a majority of the Trustees
and any shareholder vote required under the 1940 Act, if any, cause the Trust to
merge or consolidate with or into one or more trusts, partnerships (general or
limited), associations, limited liability companies or corporations formed,
organized or existing under the laws of a state, commonwealth, possession or
colony of the United States.

(c) Any agreement of merger or consolidation or certificate of merger
or consolidation may be signed by a majority of Trustees and facsimile
signatures conveyed by electronic or telecommunication means shall be valid.

(d) Pursuant to and in accordance with the provisions of Section
3815(f) of the Delaware Act, and notwithstanding anything to the contrary
contained in this Trust Instrument, an agreement of merger or consolidation
approved by the Trustees in accordance with paragraph (a) or (b) of this Section
11.05 may effect any amendment to the Trust Instrument or effect the adoption of
a new trust instrument of the Trust if it is the surviving or resulting trust in
the merger or consolidation.

SECTION 11.06 FILING OF COPIES, REFERENCES, HEADINGS. The original or a
copy of this Trust Instrument and of each amendment hereof or Trust Instrument
supplemental hereto shall be kept at the office of the Trust where it may be
inspected by any Shareholder. Anyone dealing with the Trust may rely on a
certificate by an officer or Trustee of the Trust as to whether or not any such
amendments or supplements have been made and as to any matters in connection
with the Trust hereunder, and with the same effect as if it were the original,
may rely on a copy certified by an officer or Trustee of the Trust to be a copy
of this Trust Instrument or of any such amendment or supplemental Trust
Instrument. In this Trust Instrument or in any such amendment or supplemental
Trust Instrument, references to this Trust Instrument, and all expressions such
as "herein," "hereof" and "hereunder," shall be deemed to refer to this Trust
Instrument as amended or affected by any such supplemental Trust Instrument. All
expressions like "his," "he" and "him," shall be deemed to include the feminine
and neuter, as well as masculine, genders. Headings are placed herein for
convenience of reference only and in case of any conflict, the text of this
Trust Instrument, rather than the headings, shall control. This Trust Instrument
may be executed in any number of counterparts each of which shall be deemed an
original.

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<PAGE>

SECTION 11.07 APPLICABLE LAW. The trust set forth in this instrument is
made in the State of Delaware, and the Trust and this Trust Instrument, and the
rights and obligations of the Trustees and Shareholders hereunder, are to be
governed by and construed and administered according to the Delaware Act and the
laws of said State; provided, however, that there shall not be applicable to the
Trust, the Trustees or this Trust Instrument (a) the provisions of Section 3540
of Title 12 of the Delaware Code or (b) any provisions of the laws (statutory or
common) of the State of Delaware (other than the Delaware Act) pertaining to
trusts which relate to or regulate (i) the filing with any court or governmental
body or agency of trustee accounts or schedules of trustee fees and charges,
(ii) affirmative requirements to post bonds for trustees, officers, agents or
employees of a trust, (iii) the necessity for obtaining court or other
governmental approval concerning the acquisition, holding or disposition of real
or personal property, (iv) fees or other sums payable to trustees, officers,
agents or employees of a trust, (v) the allocation of receipts and expenditures
to income or principal, (vi) restrictions or limitations on the permissible
nature, amount or concentration of trust investments or requirements relating to
the titling, storage or other manner of holding of trust assets, or (vii) the
establishment of fiduciary or other standards of responsibilities or limitations
on the acts or powers of trustees, which are inconsistent with the limitations
or liabilities or authorities and powers of the Trustees set forth or referenced
in this Trust Instrument. The Trust shall be of the type commonly called a
"business trust," and without limiting the provisions hereof, the Trust may
exercise all powers which are ordinarily exercised by such a trust under
Delaware law. The Trust specifically reserves the right to exercise any of the
powers or privileges afforded to trusts or actions that may be engaged in by
trusts under the Delaware Act, and the absence of a specific reference herein to
any such power, privilege or action shall not imply that the Trust may not
exercise such power or privilege or take such actions.

SECTION 11.08 AMENDMENTS. Except as specifically provided herein, the
Trustees may, without shareholder vote, amend or otherwise supplement this Trust
Instrument by making an amendment, a Trust Instrument supplemental hereto or an
amended and restated trust instrument. Shareholders shall have the right to vote
(a) on any amendment which would adversely affect their rights under this Trust
Instrument, (b) on any amendment to this Section 11.08, (c) on any amendment as
may be required by law or by the Trust's registration statement filed with the
Commission and (d) on any amendment submitted to them by the Trustees. Any
amendment required or permitted to be submitted to Shareholders which, as the
Trustees determine, shall affect the Shareholders of one or more Series shall be
authorized by vote of the Shareholders of each Series affected and no vote of
shareholders of a Series not affected shall be required. Notwithstanding any
other provision of this Trust Instrument, any amendment to Article X hereof
shall not limit the rights to indemnification or insurance provided therein with
respect to action or omission of Covered Persons prior to such amendment.

SECTION 11.09 The fiscal year of the Trust shall end on a specified
date as set forth in the Bylaws, provided, however, that the Trustees may change
the fiscal year of the Trust.

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SECTION 11.10 NAME RESERVATION. The Trustees on behalf of the Trust
acknowledge that KeyCorp, through its subsidiary Key Asset Management Inc.
("KAM") has licensed to the Trust the non-exclusive right to use the name "The
Victory Variable Funds" as part of the name of the Trust, and has reserved the
right to grant the non-exclusive use of the name "The Victory Variable Funds" or
any derivative thereof to any other party. In addition, KAM reserves the right
to grant the non-exclusive use of the name "The Victory Variable Funds" to, and
to withdraw such right from, any other business or other enterprise. KAM
reserves the right to withdraw from the Trust the right to use said name "The
Victory Variable Funds" and will withdraw such right if the Trust ceases to
employ, for any reason, KeyCorp, an affiliate or any successor as adviser of the
Trust.

SECTION 11.11 PROVISIONS IN CONFLICT WITH LAW. The provisions of this
Trust Instrument are severable, and if the Trustees shall determine, with the
advice of counsel, that any of such provision is in conflict with the 1940 Act,
the regulated investment company provisions of the Internal Revenue Code or with
other applicable laws and regulations, the conflicting provision shall be deemed
never to have constituted a part of this Trust Instrument; provided, however,
that such determination shall not affect any of the remaining provisions of this
Trust Instrument or render invalid or improper any action taken or omitted prior
to such determination. If any provision of this Trust Instrument shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any matter affect such provision in any other jurisdiction or any
other provision of this Trust Instrument in any jurisdiction.

IN WITNESS WHEREOF, the undersigned, being all of the initial Trustees
of the Trust, have executed this instrument as of date first written above.

/s//Carl Frischling /s/Jay G. Baris
- -------------------------------- ----------------------------
Carl Frischling, as Trustee Jay G. Baris, as Trustee
and not individually and not individually

THE VICTORY VARIABLE FUNDS

BYLAWS

FEBRUARY 11, 1998

<PAGE>

THE VICTORY VARIABLE FUNDS

BYLAWS

These Bylaws of The Victory Variable Funds (the "Trust"), a Delaware
business trust, are subject to the Trust Instrument of the Trust, dated February
11, 1998 as from time to time amended, supplemented or restated (the "Trust
Instrument"). Capitalized terms used herein which are defined in the Trust
Instrument are used as therein defined.

ARTICLE I
PRINCIPAL OFFICE

The principal office of the Trust shall be located in Cleveland, Ohio
or such other location as the Trustees may, from time to time, determine. The
Trust may establish and maintain such other offices and places of business as
the Trustees may, from time to time, determine.

ARTICLE II
OFFICERS AND THEIR ELECTION

SECTION 2.01 OFFICERS. The officers of the Trust shall be a President,
a Treasurer, a Secretary, and such other officers as the Trustees may from time
to time elect. The Trustees may delegate to any officer or committee the power
to appoint any subordinate officers or agents. It shall not be necessary for any
Trustee or other officer to be a holder of Shares in the Trust.

SECTION 2.02 ELECTION OF OFFICERS. The Treasurer and Secretary shall be
chosen by the Trustees. The President shall be chosen by and from the Trustees.
Two or more offices may be held by a single person except the offices of
President and Secretary. Subject to the provisions of Section 3.13 hereof the
President, the Treasurer and the Secretary shall each hold office until their
successors are chosen and qualified and all other officers shall hold office at
the pleasure of the Trustees.

SECTION 2.03 RESIGNATIONS. Any officer of the Trust may resign,
notwithstanding Section 2.02 hereof, by filing a written resignation with the
President, the Trustees or the Secretary, which resignation shall take effect on
being so filed or at such time as may be therein specified.

ARTICLE III
POWERS AND DUTIES OF OFFICERS AND TRUSTEES

SECTION 3.01 MANAGEMENT OF THE TRUST. The business and affairs of the
Trust shall be managed by, or under the direction of the Trustees, and they
shall have all powers

<PAGE>

necessary and desirable to carry out their responsibilities, so far as such
powers are not inconsistent with the laws of the State of Delaware, the Trust
Instrument or with these Bylaws.

SECTION 3.02 EXECUTIVE AND OTHER COMMITTEES. The Trustees may elect
from their own number an executive committee, which shall have any or all of the
powers of the Board of Trustees while the Board of Trustees is not in session.
The Trustees may also elect from their own number other committees from time to
time. The number composing such committees and the powers conferred upon the
same are to be determined by vote of a majority of the Trustees. All members of
such committees shall hold such offices at the pleasure of the Trustees, and the
Trustees may abolish any of the committees at any time. Any committee to which
the Trustees delegate any of their powers or duties shall keep records of its
meetings and shall report its actions to the Trustees. The Trustees shall have
power to rescind any action of any committee, but no such rescission shall have
retroactive effect.

SECTION 3.03 COMPENSATION. Each Trustee and each committee member may
receive such compensation for his services and reimbursement for his expenses as
may be fixed from time to time by resolution of the Trustees.

SECTION 3.04 CHAIRMAN OF THE BOARD OF TRUSTEES. The Trustees may
appoint from among their number a Chairman who shall serve as such at the
pleasure of the Trustees. When present, he shall preside at all meetings of the
Shareholders and the Trustees, and he may, subject to the approval of the
Trustees, appoint a Trustee to preside at such meetings in his absence. He shall
perform such other duties as the Trustees may from time to time designate.

SECTION 3.05 PRESIDENT. The President shall be the chief executive
officer of the Trust and, subject to the direction of the Trustees, shall have
general administration of the business and policies of the Trust. Except as the
Trustees may otherwise order, the President shall have the power to grant,
issue, execute or sign such powers of attorney, process, agreements or other
documents as may be deemed advisable or necessary in the furtherance of the
interests of the Trust or any Series thereof. He shall also have the power to
employ attorneys, accountants and other advisors and agents and counsel for the
Trust. The President shall perform such duties additional to all of the
foregoing as the Trustees may from time to time designate.

SECTION 3.06 TREASURER. The Treasurer shall be the principal financial
and accounting officer of the Trust. He shall deliver all funds and securities
of the Trust which may come into his hands to such company as the Trustees shall
employ as Custodian in accordance with the Trust Instrument and applicable
provisions of law. He shall make annual reports regarding the business and
condition of the Trust, which reports shall be preserved in Trust records, and
he shall furnish such other reports regarding the business and condition of the
Trust as the Trustees may from time to time require. The Treasurer shall perform
such additional duties as the Trustees may from time to time designate.

SECTION 3.07 SECRETARY. The Secretary shall record in books kept for
the purpose all votes and proceedings of the Trustees and the Shareholders at
their respective

<PAGE>

meetings. He shall have the custody of the seal of the Trust. The Secretary
shall perform such additional duties as the Trustees may from time to time
designate.

SECTION 3.08 VICE PRESIDENT. Any Vice President of the Trust shall
perform such duties as the Trustees or the President may from time to time
designate. At the request or in the absence or disability of the President, the
Vice President (or, if there are two or more Vice Presidents, then the senior of
the Vice Presidents) present and able to act may perform all the duties of the
President and, when so acting, shall have all the powers of and be subject to
all the restrictions upon the President.

SECTION 3.09 ASSISTANT TREASURER. Any Assistant Treasurer of the Trust
shall perform such duties as the Trustees or the Treasurer may from time to time
designate, and, in the absence of the Treasurer, the senior Assistant Treasurer,
present and able to act, may perform all the duties of the Treasurer and, when
so acting, shall have all the powers of and be subject to all the restrictions
upon the Treasurer.

SECTION 3.10 ASSISTANT SECRETARY. Any Assistant Secretary of the Trust
shall perform such duties as the Trustees or the Secretary may from time to time
designate, and, in the absence of the Secretary, the senior Assistant Secretary,
present and able to act, may perform all the duties of the Secretary and, when
so acting, shall have all the powers of and be subject to all the restrictions
upon the Secretary.

SECTION 3.11 SUBORDINATE OFFICERS. The Trustees from time to time may
appoint such officers or agents as they may deem advisable, each of whom shall
have such title, hold office for such period, have such authority and perform
such duties as the Trustees may determine. The Trustees from time to time may
delegate to one or more officers or committees of Trustees the power to appoint
any such subordinate officers or agents and to prescribe their respective terms
of office, authorities and duties.

SECTION 3.12 SURETY BONDS. The Trustees may require any officer or
agent of the Trust to execute a bond (including without limitation, any bond
required by the Investment Company Act of 1940 (the "1940 Act") and the rules
and regulations of the Commission) to the Trust in such sum and with such surety
or sureties as the Trustees may determine, conditioned upon the faithful
performance of his duties to the Trust including responsibility for negligence
and for the accounting of any of the Trust's property, funds or securities that
may come into his hands.

SECTION 3.13 REMOVAL. Any officer may be removed from office, with or
without cause, whenever in the judgment of the Trustees the best interest of the
Trust will be served thereby, by the vote of a majority of the Trustees given at
any regular meeting or any special meeting of the Trustees. In addition, any
officer or agent appointed in accordance with the provisions of Section 3.11
hereof may be removed, either with or without cause, by any officer upon whom
such power of removal shall have been conferred by the Trustees.

SECTION 3.14 REMUNERATION. The salaries or other compensation, if any,
of the officers of the Trust shall be fixed from time to time by resolution of
the Trustees.

3
<PAGE>

ARTICLE IV
SHAREHOLDERS' MEETINGS

SECTION 4.01 SPECIAL MEETINGS. A special meeting of the shareholders
shall be called by the Secretary whenever (a) ordered by the Trustees or (b)
requested in writing by the holder or holders of at least 10% of the Outstanding
Shares entitled to vote. If the Secretary, when so ordered or requested, refuses
or neglects for more than 30 days to call such special meeting, the Trustees or
the Shareholders so requesting may, in the name of the Secretary, call the
meeting by giving notice thereof in the manner required when notice is given by
the Secretary. If the meeting is a meeting of the Shareholders of one or more
Series or classes of Shares, but not a meeting of all Shareholders of the Trust,
then only special meetings of the Shareholders of such one or more Series or
classes shall be called and only the shareholders of such one or more Series or
classes shall be entitled to notice of and to vote at such meeting.

SECTION 4.02 NOTICES. Except as provided in Section 4.01, notices of
any meeting of the Shareholders shall be given by the Secretary by delivering or
mailing, postage prepaid, to each Shareholder entitled to vote at said meeting,
written or printed notification of such meeting at least ten (10) days before
the meeting, to such address as may be registered with the Trust by the
Shareholder. Notice of any Shareholder meeting need not be given to any
Shareholder if a written waiver of notice, executed before or after such
meeting, is filed with the records of such meeting, or to any Shareholder who
shall attend such meeting in person or by proxy. Notice of adjournment of a
Shareholder's meeting to another time or place need not be given, if such time
and place are announced at the meeting or reasonable notice is given to persons
present at the meeting and the adjourned meeting is held within a reasonable
time after the date set for the original meeting.

SECTION 4.03 VOTING-PROXIES. Subject to the provisions of the Trust
Instrument, shareholders entitled to vote may vote either in person or by proxy,
provided that either (a) an instrument authorizing such proxy to act is executed
by the Shareholder in writing and dated not more than eleven (11) months before
the meeting, unless the instrument specifically provides for a longer period or
(b) the Trustees adopt by resolution an electronic, telephonic, computerized or
other alternative to execution of a written instrument authorizing the proxy to
act, which authorization is received not more than eleven (11) months before the
meeting. Proxies shall be delivered to the Secretary of the Trust or other
person responsible for recording the proceedings before being voted. A proxy
with respect to shares held in the name of two or more persons shall be valid if
executed by one of them unless at or prior to exercise of such proxy the Trust
receives a specific written notice from any one of them. Unless otherwise
specifically limited by their terms, proxies shall entitle the holder thereof to
vote at any adjournment of a meeting. A proxy purporting to be exercised by or
on behalf of a Shareholder shall be deemed valid unless challenged at or prior
to its exercise and the burden or proving invalidity shall rest on the
challenger. At all meetings of the Shareholders, unless the voting is conducted
by inspectors, all questions relating to the qualifications of voters, the
validity of proxies, and the acceptance or rejection of votes shall be decided
by the Chairman of the meeting. Except as otherwise provided herein or in the
Trust Instrument, as these

4
<PAGE>

Bylaws or such Trust Instrument may be amended or supplemented from time to
time, all matters relating to the giving, voting or validity of proxies shall be
governed by the General Corporation Law of the State of Delaware relating to
proxies, and judicial interpretations thereunder, as if the Trust were a
Delaware corporation and the Shareholders were shareholders of a Delaware
corporation.

SECTION 4.04 PLACE OF MEETING. All special meetings of the Shareholders
shall be held at the principal place of business of the Trust or at such other
place in the United States as the Trustees may designate.

SECTION 4.05 ACTION WITHOUT A MEETING. Any action to be taken by
Shareholders may be taken without a meeting if all Shareholders entitled to vote
on the matter consent to the action in writing and the written consents are
filed with the records of meetings of Shareholders of the Trust. Such consent
shall be treated for all purposes as a vote at a meeting of the Shareholders
held at the principal place of business of the Trust.

ARTICLE V
TRUSTEES' MEETINGS

SECTION 5.01 SPECIAL MEETINGS. Special meetings of the Trustees may be
called orally or in writing by the Chairman of the Board of Trustees or any two
other Trustees.

SECTION 5.02 REGULAR MEETINGS. Regular meetings of the Trustees may be
held at such places and at such times as the Trustees may from time to time
determine; each Trustee present at such determination shall be deemed a party
calling the meeting and no call or notice will be required to such Trustee
provided that any Trustee who is absent when such determination is made shall be
given notice of the determination by the Chairman or any two other Trustees, as
provided for in Section 4.04 of the Trust Instrument.

SECTION 5.03 QUORUM. A majority of the Trustees shall constitute a
quorum for the transaction of business at any meeting and an action of a
majority of the Trustees in attendance constituting a quorum shall constitute
action of the Trustees.

SECTION 5.04 NOTICE. Except as otherwise provided, notice of any
special meeting of the Trustees shall be given by the party calling the meeting
to each of the Trustees, as provided for in Section 4.04 of the Trust
Instrument. A written notice may be mailed, postage prepaid, addressed to him at
his address as registered on the books of the Trust or, if not so registered, at
his last known address.

SECTION 5.05 PLACE OF MEETING. All special meetings of the Trustees
shall be held at the principal place of business of the Trust or such other
place as the Trustees may designate. Any meeting may adjourn to any place.

SECTION 5.06 SPECIAL ACTION. When all the Trustees shall be present at
any meeting however called or wherever held, or shall assent to the holding of
the meeting without

5
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notice, or shall sign a written assent thereto filed with the records of such
meeting, the acts of such meeting shall be valid as if such meeting had been
regularly held.

SECTION 5.07 ACTION BY CONSENT. Any action by the Trustees may be taken
without a meeting if a written consent thereto is signed by all the Trustees and
filed with the records of the Trustees' meeting. Such consent shall be treated,
for all purposes, as a vote at a meeting of the Trustees held at the principal
place of business of the Trustees.

SECTION 5.08 PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Except
when presence in person is required at a meeting under the 1940 Act or other
applicable laws, Trustees may participate in a meeting of Trustees by conference
telephone or similar communications equipment by means of which all persons
participating in the meeting are able to hear each other, and such participation
shall constitute presence in person at such meeting. Any meeting conducted by
telephone shall be deemed to take place at and from the principal office of the
Trust.

ARTICLE VI
FISCAL YEAR; REGISTERED OFFICE AND REGISTERED AGENT

SECTION 6.01 FISCAL YEAR. The fiscal year of the Trust and of each
Series of the Trust shall end on October 31 of each year; provided that the last
fiscal year of the Trust and each Series shall end on the date on which the
Trust or each such Series is terminated, as applicable; and further provided
that the Trustees by resolution and without a Shareholder vote may at any time
change the fiscal year of the Trust and of any or all Series (and the Trust and
each Series may have different fiscal years as determined by the Trustees).

SECTION 6.02 REGISTERED OFFICE AND REGISTERED AGENT. The initial
registered office of the Trust in the State of Delaware shall be located at 1201
North Market Street, Wilmington, Delaware 19801. The registered agent of the
Trust at such location shall be Delaware Corporation Organizers, Inc.; provided
that the Trustees by resolution and without a Shareholder vote may at any time
change the Trust's registered office or its registered agent, or both.

ARTICLE VII
INSPECTION OF BOOKS

The Trustees shall from time to time determine whether and to what
extent, and at what times and places, and under what conditions and regulations
the accounts and books of the Trust or any of them shall be open to the
inspection of the Shareholders; and no Shareholder shall have any right to
inspect any account or book or document of the Trust except as conferred by law
or otherwise by the Trustees or by resolution of the Shareholders.

6
<PAGE>

ARTICLE VIII
INSURANCE OF OFFICERS, TRUSTEES, AND EMPLOYEES

The Trust may purchase and maintain insurance on behalf of any Covered
Person (as defined in Section 10.02 of the Trust Instrument) or employee of the
Trust, including any Covered Person or employee of the Trust who is or was
serving at the request of the Trust as a Trustee, officer or employee of a
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him and claimed by him in any such capacity or
arising out of his status as such, whether or not the Trustees would have the
power to indemnify him against such liability.

The Trust may not acquire or obtain a contract for insurance that
protects or purports to protect any Trustee or officer of the Trust against any
liability to the Trust or its Shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.

ARTICLE IX
SEAL

The seal of the Trust shall be circular in form bearing the inscription:

"THE VICTORY VARIABLE FUNDS, FEBRUARY 11, 1998
THE STATE OF DELAWARE"

7
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TABLE OF CONTENTS

PAGE

ARTICLE I
PRINCIPAL OFFICE..............................................................1

ARTICLE II
OFFICERS AND THEIR ELECTION...................................................1
Section 2.01 Officers.....................................................1
Section 2.02 Election of Officers........................................1
Section 2.03 Resignations.................................................1

ARTICLE III
POWERS AND DUTIES OF OFFICERS AND TRUSTEES....................................1
Section 3.01 Management of the Trust......................................1
Section 3.02 Executive And Other Committees...............................2
Section 3.03 Compensation.................................................2
Section 3.04 Chairman of the Board of Trustees............................2
Section 3.05 President....................................................2
Section 3.06 Treasurer....................................................2
Section 3.07 Secretary....................................................2
Section 3.08 Vice President...............................................3
Section 3.09 Assistant Treasurer..........................................3
Section 3.10 Assistant Secretary..........................................3
Section 3.11 Subordinate Officers.........................................3
Section 3.12 Surety Bonds.................................................3
Section 3.13 Removal......................................................3
Section 3.14 Remuneration.................................................3

ARTICLE IV
SHAREHOLDERS' MEETINGS........................................................4
Section 4.01 Special Meetings.............................................4
Section 4.02 Notices......................................................4
Section 4.03 Voting-Proxies...............................................4
Section 4.04 Place of Meeting.............................................5
Section 4.05 Action Without a Meeting.....................................5

i
<PAGE>

ARTICLE V
TRUSTEES' MEETINGS............................................................5
Section 5.01 Special Meetings.............................................5
Section 5.02 Regular Meetings.............................................5
Section 5.03 Quorum.......................................................5

Section 5.04 Notice.......................................................5
Section 5.05 Place of Meeting.............................................5
Section 5.06 Special Action...............................................5
Section 5.07 Action by Consent............................................6
Section 5.08 Participation in Meetings By Conference Telephone............6

ARTICLE VI
FISCAL YEAR; REGISTERED OFFICE AND REGISTERED AGENT...........................6
Section 6.01 Fiscal Year..................................................6
Section 6.02 Registered Office and Registered Agent.......................6

ARTICLE VII
INSPECTION OF BOOKS...........................................................6

ARTICLE VIII
INSURANCE OF OFFICERS, TRUSTEES, AND EMPLOYEES................................7

ARTICLE IX
SEAL..........................................................................7

[LETTERHEAD OF KRAMER, LEVIN, NAFTALIS & FRANKEL]

August 21, 1998

The Victory Variable Funds
3435 Stelzer Road
Columbus, OH 43219

Re: The Victory Variable Funds
Registration Statement on Form N-1A
ICA #: 811-8979
------------------------------------

Dear Gentlemen:

We hereby consent to the reference of our firm as Counsel in this
Registration Statement on Form N-1A.

Very truly yours,

/s/Kramer, Levin, Naftalis & Frankel
------------------------------------

[LETTERHEAD OF PRICEWATERHOUSECOOPERS LLP]

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the reference to our Firm under the caption "Independent
Accountanats" in the Statement of Additional Information in this initial
Registration Statement on Form N-1A of The Victory Variable Funds.

/s/PricewaterhouseCoopers LLP
-----------------------------
PricewaterhouseCoopers LLP

Columbus, Ohio
August 20, 1998

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE
VICTORY VARIABLE FUNDS, a Delaware business trust, (the "Trust") constitutes and
appoints Carl Frischling and Jay G. Baris my true and lawful attorneys-in-fact,
with full power of substitution and resubstitution, for me and in my name, place
and stead, in any and all capacities as a trustee of the Trust, to sign for me
and in my name in the appropriate capacity, any and all Registration Statements
of the Trust under the Securities Act of 1933 and Investment Company Act of
1940, any and all Pre-Effective Amendments to any Registration Statement of the
Trust, any and all Post-Effective Amendments to said Registration Statements,
any Registration Statements on Form N-14, and any supplements or other
instruments in connection therewith, and generally to do all such things in my
name and behalf in connection therewith as said attorneys-in-fact deem necessary
or appropriate, and that have been approved by the Board of Trustees of the
Trust or by the appropriate officers of the Trust, acting in good faith and in a
manner they reasonably believe to be in the best interests of the Trust, upon
the advice of counsel, such approval to be conclusively evidenced by their
execution thereof, to comply with the provisions of the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended, and all related
requirements of the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact or their substitutes may do or cause
to be done by virtue hereof.

Witness my hand on this 17th day of April, 1998.

/s/Roger Noall
--------------
Roger Noall

<PAGE>

POWER OF ATTORNEY

Witness my hand on this 17th day of April, 1998.

/s/Leigh A. Wilson
------------------
Leigh A. Wilson

<PAGE>

POWER OF ATTORNEY

Witness my hand on this 20th day of April, 1998.

/s/Edward P. Campbell
---------------------
Edward P. Campbell

<PAGE>

POWER OF ATTORNEY

Witness my hand on this 17th day of April, 1998.

/s/Harry Gazelle
----------------
Harry Gazelle

<PAGE>

POWER OF ATTORNEY

Witness my hand on this 17th day of April, 1998.

/s/Thomas F. Morrissey
----------------------
Thomas F. Morrissey

<PAGE>

POWER OF ATTORNEY

Witness my hand on this 8th day of May, 1998.

/s/H. Patrick Swygert
---------------------
Patrick Swygert

<PAGE>

POWER OF ATTORNEY

Witness my hand on this 21st day of April, 1998.

/s/Frank A. Weil
----------------
Frank A. Weil

<PAGE>

POWER OF ATTORNEY

Witness my hand on this 17th day of April, 1998.

/s/Eugene J. McDonald
---------------------