SBL FUND, 497, 1997-10-20

SBL FUND
497, 1997-10-20

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<PAGE>

SBL FUND
Member of the Security Benefit Group of Companies
700 Harrison, Topeka, Kansas 66636-0001

PROSPECTUS
OCTOBER 15, 1997

SBL Fund (the "Fund") is an open-end, diversified series management
investment company offering portfolios with different investment objectives and
strategies.
SERIES A (GROWTH SERIES) seeks long-term capital growth by investing in a
broadly-diversified portfolio of common stocks, securities convertible into
common stocks, preferred stocks and bonds and other debt securities.
SERIES B (GROWTH-INCOME SERIES) seeks long-term growth of capital with
secondary emphasis on income. Series B seeks these objectives by investing in
various types of securities, including common stocks, convertible securities,
preferred stocks and debt securities which may include higher yielding, higher
risk securities ordinarily characteristic of securities in the lower rating
categories of the recognized rating services.
SERIES C (MONEY MARKET SERIES) seeks as high a level of current income as
is consistent with preservation of capital by investing in money market
securities with varying maturities.
SERIES D (WORLDWIDE EQUITY SERIES) seeks long-term growth of capital
primarily through investment in common stocks and equivalents of companies
domiciled in foreign countries and the United States.
SERIES E (HIGH GRADE INCOME SERIES) seeks to provide current income with
security of principal by investing in a broad range of debt securities,
including U.S. and foreign corporate debt securities and securities issued by
U.S. and foreign governments.
SERIES J (EMERGING GROWTH SERIES) seeks capital appreciation by investing
in a diversified portfolio of securities which may include common stocks,
preferred stocks, debt securities and securities convertible into common stocks.
SERIES K (GLOBAL AGGRESSIVE BOND SERIES) seeks high current income and, as
a secondary objective, capital appreciation by investing in a combination of
foreign and domestic high-yield, lower rated debt securities (commonly known as
"junk bonds").
SERIES M (SPECIALIZED ASSET ALLOCATION SERIES) seeks high total return,
consisting of capital appreciation and current income. The Series seeks this
objective by following an asset allocation strategy that contemplates shifts
among a wide range of investment categories and market sectors, including equity
and debt securities of domestic and foreign issuers.
SERIES N (MANAGED ASSET ALLOCATION SERIES) seeks a high level of total
return by investing primarily in a diversified portfolio of debt and equity
securities.
SERIES O (EQUITY INCOME SERIES) seeks to provide substantial dividend
income and also capital appreciation by investing primarily in dividend-paying
common stocks of established companies.
SERIES P (HIGH YIELD SERIES) seeks high current income and as a secondary
objective, capital appreciation by investing in a combination of domestic and
foreign high-yield, lower rated debt securities (commonly known as "junk
bonds").
SERIES S (SOCIAL AWARENESS SERIES) seeks capital appreciation by investing
in various types of securities, including common stocks, convertible securities,
preferred stocks and debt securities that meet certain social criteria
established for the Series.
SERIES V (VALUE SERIES) seeks long-term growth of capital by investing
primarily in a diversified portfolio of common stocks, securities convertible
into common stocks, preferred stocks, and warrants which the Investment Manager
believes are undervalued.
SERIES X (SMALL CAP SERIES) seeks long-term growth of capital by investing
primarily in domestic and foreign equity securities of small capitalization
companies (defined as companies with a market capitalization of less than $1
billion at the time of purchase).
AN INVESTMENT IN THE FUND, INCLUDING AN INVESTMENT IN SERIES C, IS NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. IN ADDITION TO OTHER RISKS, THE
HIGH YIELD, HIGH RISK BONDS IN WHICH SERIES B, SERIES K, SERIES N, SERIES O,
SERIES P AND SERIES X MAY INVEST ARE SUBJECT TO GREATER FLUCTUATIONS IN VALUE
AND RISK OF LOSS OF INCOME AND PRINCIPAL DUE TO DEFAULT BY THE ISSUER THAN ARE
LOWER YIELDING, HIGHER RATED BONDS.
The Fund's shares are sold to Security Benefit Life Insurance Company
("SBL") for allocation to one or more separate accounts established for funding
variable life insurance policies and variable annuity contracts issued by SBL.
This Prospectus sets forth concisely the information that a prospective
investor should know about SBL Fund. It should be read and retained for future
reference. A Statement of Additional Information about the Fund, dated October
15, 1997, has been filed with the Securities and Exchange Commission. The
Statement of Additional Information, as it may be supplemented from time to
time, is incorporated by reference in this Prospectus. It is available at no
charge by writing Security Distributors, Inc., 700 Harrison Street, Topeka,
Kansas 66636-0001, or by calling (785) 431-3127 or (800) 888-2461.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

AN INVESTMENT IN THE FUND INVOLVES RISK, INCLUDING LOSS OF PRINCIPAL, AND IS NOT
A DEPOSIT OR OBLIGATION OF, OR GUARANTEED BY ANY BANK. THE FUND IS NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER AGENCY.

1
<PAGE>
SBL FUND CONTENTS
Page
Financial Highlights ....................................................... 3
SBL Fund ................................................................... 6
Investment Objectives and Policies of the Series ........................... 6
Series A (Growth Series) .............................................. 6
Series B (Growth-Income Series) ....................................... 6
Series C (Money Market Series) ........................................ 7
Series D (Worldwide Equity Series) .................................... 8
Series E (High Grade Income Series) ................................... 9
Series J (Emerging Growth Series) ..................................... 10
Series K (Global Aggressive Bond Series) .............................. 11
Series M (Specialized Asset Allocation Series) ........................ 13
Series N (Managed Asset Allocation Series) ............................ 14
Series O (Equity Income Series) ....................................... 17
Series P (High Yield Series) .......................................... 18
Series S (Social Awareness Series) .................................... 19
Series V (Value Series) ............................................... 20
Series X (Small Cap Series) ........................................... 21
Investment Methods and Risk Factors ........................................ 22
Management of the Fund ..................................................... 34
Portfolio Management ....................................................... 35
Sale and Redemption of Shares .............................................. 37
Distributions and Federal Income Tax Considerations ........................ 38
Foreign Taxes .............................................................. 38
Determination of Net Asset Value ........................................... 38
Trading Practices and Brokerage ............................................ 39
Performance Information .................................................... 39
General Information ........................................................ 40
Organization .......................................................... 40
Custodian, Transfer Agent and Dividend-Paying Agent ................... 40
Contractowner Inquiries ............................................... 40

2
<PAGE>

SBL FUND
FINANCIAL HIGHLIGHTS

The following financial highlights for each of the years presented, except
the six-month period ended June 30, 1997 and the four-month period ended August
31, 1997 for Series V, have been audited by Ernst & Young LLP. Such information
for each of the five years in the period ended December 31, 1996, should be read
in conjunction with the financial statements of the Fund and the report of Ernst
& Young LLP, the Fund's independent auditors, appearing in the December 31, 1996
Annual Report which is incorporated by reference in this Prospectus. The Fund's
Annual Report also contains additional information about the performance of the
Fund and may be obtained without charge by calling Security Distributors, Inc.
at 1-800-888-2461. The information for each of the years preceding and including
the period ended December 31, 1991, the six-month period ended June 30, 1997,
and the four-month period ended August 31, 1997, is not covered by the report of
Ernst & Young LLP.

<TABLE>
<CAPTION>
NET TOTAL
ASSET NET NET GAIN FROM DIVIDENDS DISTRI-
FISCAL VALUE INVEST- (LOSS) ON INVEST- (FROM NET BUTIONS
YEAR BEGIN- MENT SECURITIES MENT INVEST- (FROM RETURN TOTAL
ENDED NING OF INCOME (REALIZED & OPERA- MENT CAPITAL OF DISTRI-
DEC. 31 PERIOD (LOSS) UNREALIZED) TIONS INCOME) GAINS) CAPITAL BUTIONS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SERIES A

1987(a) $12.73 $0.29 $0.711 $1.001 $(0.458) $(2.083) $--- $(2.541)
1988 11.19 0.36 0.776 1.136 --- (0.006) --- (0.006)
1989 12.32 0.40 3.90 4.30 (0.37) --- --- (0.37)
1990 16.25 0.30 (1.95) (1.65) (0.64) (1.06) --- (1.70)
1991 12.90 0.29 4.34 4.63 (0.27) --- --- (0.27)
1992 17.26 0.23 1.615 1.845 (0.242) (0.533) --- (0.775)
1993 18.33 0.39 2.076 2.466 (0.224) (0.752) --- (0.976)
1994 19.82 0.20 (0.442) (0.242) (0.38) (3.198) --- (3.578)
1995(i) 16.00 0.18 5.648 5.828 (0.153) (0.645) --- (0.798)
1996(i) 21.03 0.18 4.495 4.675 (0.194) (1.201) --- (1.395)
1997(k) 24.31 0.09 3.99 4.08 --- --- --- ---

SERIES B

1987(a) $16.45 $0.63 $0.08 $0.71 $(0.937) $(0.513) $--- $(1.45)
1988 15.71 1.14 1.888 3.028 --- (0.008) --- (0.008)
1989 18.73 0.65 4.61 5.26 (1.03) (0.51) --- (1.54)
1990 22.45 0.70 (1.70) (1.00) (0.67) (0.57) --- (1.24)
1991 20.21 0.58 6.953 7.533 (0.66) (0.233) --- (0.893)
1992 26.85 0.65 0.999 1.649 (0.583) (0.156) --- (0.739)
1993 27.76 0.64 2.009 2.649 (0.679) --- --- (0.679)
1994 29.73 0.51 (1.34) (0.83) (0.680) (1.68) --- (2.36)
1995(i) 26.54 0.79 7.16 7.95 (0.540) --- --- (0.540)
1996(i) 33.95 0.83 5.16 5.99 (0.778) (3.762) --- (4.54)
1997(k) 35.40 0.41 5.06 5.47 --- --- --- ---

SERIES C

1987(a) $12.08 $0.76 $ --- $0.76 $(1.43) $--- $--- $(1.43)
1988 11.41 0.822 --- 0.822 (0.002) --- --- (0.002)
1989(a) 12.23 1.09 --- 1.09 (0.53) --- --- (0.53)
1990(a) 12.79 1.00 --- 1.00 (1.05) --- --- (1.05)
1991(a) 12.74 0.69 0.01 0.70 (0.92) --- --- (0.92)
1992 12.52 0.43 (0.03) 0.40 (0.71) --- --- (0.71)
1993 12.21 0.29 0.027 0.317 (0.437) --- --- (0.437)
1994 12.09 0.41 0.035 0.445 (0.265) --- --- (0.265)
1995(i) 12.27 0.74 (0.085) 0.655 (0.585) --- --- (0.585)
1996(a)(i) 12.34 0.61 0.01 0.62 (0.40) --- --- (0.40)
1997(k) 12.56 0.316 0.004 0.32 --- --- --- ---

SERIES D

1987(a) $11.62 $1.41 $(2.012) $(0.692) $(2.888) $--- $--- $(2.888)
1988 8.13 1.22 (0.82) 0.40 --- --- --- ---
1989 8.53 1.14 (1.81) (0.67) (1.33) --- --- (1.33)
1990 6.53 1.00 (2.30) (1.30) (1.26) --- --- (1.26)
1991(a)(b) 3.97 0.15 0.34 0.49 (0.55) --- --- (0.55)
1992(a) 3.91 0.02 (0.122) (0.102) (0.048) --- --- (0.048)
1993(a) 3.76 0.02 1.166 1.186 (0.006) --- --- (0.006)
1994(a) 4.94 0.02 1.115 0.135 (0.005) --- --- (0.005)
1995 5.07 0.05 0.4989 0.5489 (0.0009) (0.058) --- (0.0589)
1996 5.56 0.03 0.93 0.96 (0.20) (0.18) --- (0.38)
1997(k) 6.14 0.04 0.74 0.78 --- --- --- ---

<CAPTION>
RATIO AVERAGE
NET RATIO OF OF NET COMMISSION
FISCAL ASSET NET ASSETS EXPENSES INCOME PAID PER
YEAR VALUE TOTAL END OF TO (LOSS) TO PORTFOLIO INVESTMENT
ENDED END OF RETURN PERIOD AVERAGE AVERAGE TURNOVER SECURITY
DEC. 31 PERIOD (d) (THOUSANDS) NET ASSETS NET ASSETS RATE TRADED(j)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SERIES A

1987(a) $11.19 6.2% $ 127,627 0.64% 1.94% 249% $ N/A
1988 12.32 10.2% 113,111 0.66% 2.47% 211% N/A
1989 16.25 35.9% 144,576 0.79% 2.34% 113% N/A
1990 12.90 (9.8%) 165,554 0.85% 2.31% 98% N/A
1991 17.26 36.1% 235,115 0.87% 1.97% 95% N/A
1992 18.33 11.1% 296,548 0.86% 1.46% 77% N/A
1993 19.82 13.7% 317,407 0.86% 2.01% 108% N/A
1994 16.00 (1.7%) 332,288 0.84% 1.13% 90% N/A
1995(i) 21.03 36.8% 519,891 0.83% 1.13% 83% N/A
1996(i) 24.31 22.7% 714,591 0.83% 0.90% 57% 0.0598
1997(k) 28.39 16.8% 841,910 0.81% 0.71% 69% 0.0600

SERIES B

1987(a) $15.71 3.6% $ 84,601 0.62% 3.31% 28% $ N/A
1988 18.73 19.3% 106,620 0.64% 6.50% 33% N/A
1989 22.45 28.4% 163,155 0.79% 4.03% 52% N/A
1990 20.21 (4.4%) 197,472 0.87% 4.32% 62% N/A
1991 26.85 37.7% 348,969 0.86% 3.39% 62% N/A
1992 27.76 6.3% 467,208 0.86% 3.22% 56% N/A
1993 29.73 9.6% 583,599 0.86% 2.63% 95% N/A
1994 26.54 (3.0%) 595,154 0.84% 2.07% 43% N/A
1995(i) 33.95 30.1% 795,113 0.83% 2.70% 94% N/A
1996(i) 35.40 18.3% 956,586 0.84% 2.56% 58% 0.0602
1997(k) 40.87 15.5% 1,097,414 0.83% 2.19% 54% 0.0600

SERIES C

1987(a) $11.41 6.4% $ 44,463 0.66% 6.37% --- $ N/A
1988 12.23 7.2% 82,904 0.65% 7.17% --- N/A
1989(a) 12.79 9.0% 94,560 0.63% 8.58% --- N/A
1990(a) 12.74 8.0% 73,599 0.60% 7.66% --- N/A
1991(a) 12.52 5.6% 86,610 0.61% 5.42% --- N/A
1992 12.21 3.2% 87,246 0.61% 3.19% --- N/A
1993 12.09 2.6% 99,092 0.61% 2.65% --- N/A
1994 12.27 3.7% 118,668 0.61% 3.70% --- N/A
1995(i) 12.34 5.4% 105,436 0.60% 5.27% --- N/A
1996(a)(i) 12.56 5.1% 128,672 0.58% 4.89% --- N/A
1997(k) 12.88 2.5% 138,376 0.58% 5.00% --- N/A

SERIES D

1987(a) $ 8.13 (5.9%) $ 12,651 0.77% 12.71% 111% $ N/A
1988 8.53 4.9% 12,310 0.67% 13.27% 108% N/A
1989 6.53 (8.9%) 10,270 0.80% 13.97% 111% N/A
1990 3.97 (22.7%) 5,522 0.93% 14.11% 96% N/A
1991(a)(b) 3.91 12.7% 11,688 1.58% 3.95% 113% N/A
1992(a) 3.76 (2.6%) 25,183 1.62% 0.50% 81% N/A
1993(a) 4.94 31.6% 98,252 1.42% 0.38% 70% N/A
1994(a) 5.07 2.7% 147,033 1.34% 0.50% 82% N/A
1995 5.56 10.9% 177,781 1.31% 0.90% 169% N/A
1996 6.14 17.5% 247,026 1.30% 0.74% 115% 0.0276
1997(k) 6.92 12.7% 303,379 1.24% 1.50% 141% 0.0100
</TABLE>

3
<PAGE>

1987(a) $11.87 $ 0.93 $(0.658) $ 0.272 $(1.662) $ --- $ --- $(1.662)
1988 10.48 1.02 (0.26) 0.76 --- --- --- ---
1989 11.24 0.73 0.59 1.32 (0.91) --- --- (0.91)
1990 11.65 0.82 (0.07) 0.75 (0.73) --- --- (0.73)
1991 11.67 0.76 1.17 1.93 (0.78) --- --- (0.78)
1992 12.82 0.78 0.168 0.948 (0.748) --- --- (0.748)
1993 13.02 0.64 1.02 1.66 (0.79) (0.11) --- (0.90)
1994 13.78 0.76 (1.713) (0.953) (0.69) (0.617) --- (1.307)
1995(i) 11.52 0.74 1.36 2.10 (0.76) --- --- (0.76)
1996(i) 12.86 0.75 (0.853) (0.103) (0.757) --- --- (0.757)
1997(k) 12.00 0.55 (0.22) 0.33 --- --- --- ---

SERIES J

1992(c) $10.00 $ 0.01 $ 2.46 $ 2.47 $ --- $ --- $ --- $ ---
1993 12.47 (0.01) 1.711 1.701 (0.001) --- --- (0.001)
1994 14.17 (0.01) (0.713) (0.723) --- (0.007) --- (0.007)
1995(i) 13.44 0.04 2.58 2.62 --- --- --- ---
1996(i) 16.06 (0.04) 2.93 2.89 (0.029) (0.671) --- (0.700)
1997(k) 18.25 (0.02) 1.11 1.09 --- --- --- ---

SERIES S

1991(c) $10.00 $ 0.05 $ 0.50 $ 0.55 $ --- $ --- $ --- $ ---
1992(a) 10.55 0.03 1.691 1.721 (0.021) --- --- (0.021)
1993 12.25 0.02 1.432 1.452 (0.012) --- --- (0.012)
1994 13.69 0.08 (0.595) (0.515) (0.02) (0.185) --- (0.205)
1995(i) 12.97 0.09 3.507 3.597 (0.077) --- --- (0.077)
1996(i) 16.49 0.03 3.073 3.103 (0.083) (0.43) --- (0.513)
1997(k) 19.08 0.10 2.000 2.100 --- --- --- ---

SERIES K

1995(a)(e)(h) $10.00 $ 0.54 $ 0.22 $ 0.76 $(0.466) $(0.044) $(0.03) $(0.540)
1996(h) 10.22 0.90 0.50 1.40 (0.77) (0.13) --- (0.90)
1997(h)(k) 10.72 0.48 (0.22) 0.26 --- --- --- ---

SERIES M

1995(a)(e) $10.00 $ 0.169 $ 0.541 $ 0.71 $ --- $ --- $ --- $ ---
1996 10.71 0.150 1.364 1.514 (0.119) (0.055) --- (.174)
1997(k) 12.05 0.09 0.80 0.89 --- --- --- ---

SERIES N

1995(a)(e) $10.00 $ 0.156 $ 0.574 $ 0.73 $ --- $ --- $ --- $ ---
1996 10.73 0.193 1.175 1.368 (0.065) (0.013) --- (0.078)
1997(k) 12.02 0.150 1.250 1.400 --- --- --- ---

SERIES O

1995(a)(e) $10.00 $ 0.166 $ 1.534 $ 1.70 $ --- $ --- $ --- $ ---
1996 11.70 0.169 2.173 2.342 (0.03) (0.002) --- (0.032)
1997(k) 14.01 0.08 1.95 2.03 --- --- --- ---

SERIES P

1996(a)(f)(h) $15.00 $ 0.51 $ 0.48 $ 0.99 $ --- $ --- $ --- $ ---
1997(h)(k) 15.99 0.714 0.276 0.99 --- --- --- ---

SERIES V

1997(a)(g)(h)(m) $10.00 $ 0.044 $ 2.346 $ 2.390 --- --- --- ---

1987(a) $10.48 2.4% $ 22,025 0.75% 7.86% 138% $ N/A
1988 11.24 7.3% 23,338 0.65% 9.17% 68% N/A
1989 11.65 11.9% 34,811 0.78% 9.00% 56% N/A
1990 11.67 6.7% 43,908 0.85% 8.83% 28% N/A
1991 12.82 17.0% 63,602 0.86% 8.24% 24% N/A
1992 13.02 7.4% 81,440 0.86% 7.41% 76% N/A
1993 13.78 12.6% 112,900 0.86% 6.21% 151% N/A
1994 11.52 (6.9%) 107,078 0.85% 6.74% 185% N/A
1995(i) 12.86 18.6% 125,652 0.85% 6.60% 180% N/A
1996(i) 12.00 (0.7%) 134,041 0.83% 6.77% 232% N/A
1997(k) 12.33 2.8% 119,934 0.83% 6.90% 151% N/A

SERIES J

1992(c) $12.47 24.7% $ 7,113 1.06% 0.22% 4% $ N/A
1993 14.17 13.6% 42,096 0.91% (0.14%) 117% N/A
1994 13.44 (5.1%) 76,940 0.88% (0.11%) 91% N/A
1995(i) 16.06 19.5% 93,379 0.84% 0.26% 202% N/A
1996(i) 18.25 18.0% 148,421 0.84% (0.21%) 123% 0.0601
1997(k) 19.34 6.0% 202,220 0.82% (0.05%) 79% 0.0600

SERIES S

1991(c) $10.55 5.5% $ 2,711 1.00% 1.49% 162% $ N/A
1992(a) 12.25 16.4% 9,653 0.92% 0.24% 110% N/A
1993 13.69 11.9% 19,490 0.90% 0.23% 105% N/A
1994 12.97 (3.7%) 24,539 0.90% 0.75% 67% N/A
1995(i) 16.49 27.7% 36,830 0.86% 0.75% 122% N/A
1996(i) 19.08 18.8% 57,497 0.84% 0.30% 67% 0.0602
1997(k) 21.18 11.0% 74,079 0.82% 0.48% 57% 0.0600

SERIES K

1995(a)(e)(h) $10.22 7.6% $ 5,678 1.63% 11.03% 127% $ N/A
1996(h) 10.72 13.7% 12,720 0.84% 10.79% 86% N/A
1997(h)(k) 10.98 2.4% 15,785 0.60% 9.56% 107% N/A

SERIES M

1995(a)(e) $10.71 7.1% $ 15,976 1.94% 3.2% 181% $ N/A
1996 12.05 14.2% 38,396 1.34% 2.73% 40% 0.0266
1997(k) 12.94 7.4% 47,680 1.27% 2.23% 123% 0.0452

SERIES N

1995(a)(e) $10.73 7.3% $ 10,580 1.90% 2.8% 26% $ N/A
1996 12.02 12.8% 23,345 1.45% 2.67% 41% 0.0393
1997(k) 13.42 11.7% 26,428 1.47% 2.77% 64% 0.0296

SERIES O

1995(a)(e) $11.70 17.0% $ 13,528 1.40% 3.0% 3% $ N/A
1996 14.01 20.0% 62,377 1.15% 2.62% 22% 0.0385
1997(k) 16.04 14.5% 105,087 1.09% 2.49% 49% 0.0314

SERIES P

1996(a)(f)(h) $15.99 6.6% $ 2,665 0.28% 8.24% 151% $ N/A
1997(h)(k) 10.98 6.2% 2,830 0.29% 8.78% 59% N/A

SERIES V

1997(a)(g)(h)(m) $12.39 23.9% $ 1,896 0.55% 1.21% 48% 0.06000
</TABLE>

(a) Net investment income per share has been calculated using the weighted
monthly average number of capital shares outstanding.
(b) Effective May 1, 1991, the investment objective of Series D was changed
from high current income to long-term capital growth through investment in
common stocks and equivalents of companies domiciled in foreign countries
and the United States.
(c) The dates of inception for Series J and S were October 1, 1992 and May 1,
1991 respectively. On these dates the respective Series commenced
operations each with a net asset value of $10 per share. Percentage
amounts for the initial periods of each series have been annualized,
except for total return.
(d) Total return information does not take into account (i) any sales charges
paid at the time of purchase, (ii) expenses of the separate account, or
(iii) expenses of the related variable annuity or variable life insurance
contract. Inclusion of these charges would reduce the total return
information for all periods shown.
(e) Series K, M, N and O were initially capitalized on June 1, 1995 with net
asset values of $10 per share. Percentage amounts for the period have been
annualized, except for total return.

4
<PAGE>

(f) Series P was initially capitalized on August 5, 1996 with a net asset value
of $15 per share. Percentage amounts for the period have been annualized,
except total return.

(g) Series V was initially capitalized on May 1, 1997 with a net asset value of
$10 per share. Percentage amounts for the period, except total return, have
been annualized.

(h) Fund expenses were reduced by the Investment Manager during the periods,
and expense ratios absent such reimbursement would have been as follows:

1995 1996 1997
----- ----- -----

Series K 2.03% 1.59% 1.35%
Series P --- 1.11% 1.25%
Series V --- --- 1.30%

(j) Expense ratios were calculated without the reduction for custodian fees
earnings credits beginning February 1, 1995. The following Series' expense
ratios were reduced as a result of such credits and would have been as
follows had such credits been included.

1995
-----
Series J 0.83%
Series S 0.84%

(j) Brokerage commissions paid on portfolio transactions increase the cost of
securities purchased or reduce the proceeds of securities sold and are not
reflected in the Fund's statement of operations. Shares traded on a
principal basis, such as most over-the-counter and fixed-income
transactions, pay a "spread" or "mark-up" rather than a commission and are
therefore excluded from this calculation. Generally, non-U.S. commissions
are lower than U.S. commissions when expressed as cents per share but
higher when expressed as a percentage of transactions because of the lower
per-share prices of many non-U.S. securities. Prior to 1996, average
commission information was not required to be disclosed.

(k) Unaudited figures for the six-month period ended June 30, 1997. Percentage
amounts for the period, except total return, have been annualized.

(m) Unaudited figures for the period May 1, 1997 (date of inception) to August
31, 1997.

5
<PAGE>

SBL FUND

SBL Fund (the "Fund"), a Kansas corporation, was organized on May 26, 1977,
to serve as the investment vehicle for certain of Security Benefit Life
Insurance Company's ("SBL") variable annuity and variable life separate
accounts. Shares of the Fund will be sold to SBL for allocation to such separate
accounts established for the purpose of funding variable annuity and variable
life insurance contracts issued by SBL. The Fund reserves the right to expand
the class of persons eligible to purchase shares of any Series of the Fund.
The Fund is subject to certain investment policy limitations which may not
be changed without stockholder approval. Among these limitations, the more
important ones are that the Fund will not, with respect to 75 percent of its
total assets, invest more than 5 percent of the value of its assets in any one
issuer other than the U.S. Government or its agencies or instrumentalities, or
purchase more than 10 percent of the outstanding voting securities of any
issuer. In addition, no Series will invest more than 25 percent of its total
assets in any one industry. The full text of the investment policy limitations
is set forth in the Fund's "Statement of Additional Information."
It is conceivable that in the future it may be disadvantageous for variable
life insurance separate accounts and variable annuity separate accounts to
invest in the Fund simultaneously. Although neither SBL nor SBL Fund currently
foresee any such disadvantages, either to variable life insurance policyowners
or to variable annuity contractowners, the Fund's Board of Directors intends to
monitor events in order to identify any material conflicts between such
policyowners and contractowners resulting from changes in state insurance law,
changes in federal income tax regulation, changes in the investment management
of any portfolio of the underlying fund, and the differences between voting
instructions given by policyowners and contractowners. The Board will determine
what action, if any, should be taken in response to any such conflicts. If the
Board of Directors were to conclude that separate funds should be established
for variable life and variable annuity separate accounts, SBL would bear the
attendant expenses, but variable life insurance policyowners and variable
annuity contractowners would no longer have the economies of scale resulting
from a larger combined fund.

INVESTMENT OBJECTIVES AND POLICIES OF THE SERIES

The investment objective of each Series is described below. There are risks
inherent in the ownership of any security and there can be no assurance that
such investment objective will be achieved. Some of the risks involved are
described below and in the Statement of Additional Information. The investment
objective and policies of each Series may be modified at any time without
stockholder approval. However, each of the Series is subject to certain
investment policy limitations set forth in the Statement of Additional
Information, which may not be changed without stockholder approval. Each of the
Series may borrow money from banks as a temporary measure for emergency
purposes, to facilitate redemption requests, or for other purposes consistent
with the Series' investment objective and policies. See the discussion of
borrowing under "Investment Methods and Risk Factors." Pending investment in
other securities or to meet potential redemptions or expenses, each Series may
invest in certificates of deposit issued by banks, bank demand accounts,
repurchase agreements and high quality money market instruments.

SERIES A (GROWTH SERIES)

SERIES B (GROWTH-INCOME SERIES)

The investment objective of Series B is long-term growth of capital with
secondary emphasis on income. Series B seeks to achieve this objective through
investment in a diversified portfolio which will ordinarily consist principally
of common stocks, which may include ADRs, but may also include other securities
when deemed advisable. Such other securities may include (i) securities
convertible into common stocks; (ii) preferred stocks; (iii) debt securities
issued by U.S. corporations; (iv) securities issued by the U.S.

- -------------------------------------------------------------------------------
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus and in the "Statement of Additional Information," in connection with
the offer contained in this Prospectus, and, if given or made, such other
information or representation must not be relied upon as having been authorized
by the Fund, the investment adviser, or the distributor.
- -------------------------------------------------------------------------------

6
<PAGE>

Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (v) securities issued by
foreign governments, their agencies, and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars;
(vi) higher yielding, high risk debt securities (commonly referred to as "junk
bonds"); and (vii) zero coupon securities. In the selection of securities for
investment, the potential for appreciation and future dividends is given more
weight than current dividends. From time to time, Series B may purchase
government bonds or commercial notes on a temporary basis for defensive
purposes.
With respect to Series B's investment in debt securities, there is no
percentage limitation on the amount of its assets that may be invested in
securities within any particular rating classification. See the Statement of
Additional Information for a description of corporate bond ratings. Series B
may invest in securities which are at the time of purchase rated Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Corporation
("S&P"). In addition, Series B may invest in higher yielding, longer-term
fixed-income securities in the lower rating (higher risk) categories of the
recognized rating services (commonly referred to as "junk bonds"). These include
securities which are at the time of purchase rated Ba or lower by Moody's or BB
or lower by S&P. However, the Investment Manager will not rely principally on
the ratings assigned by the rating services. Because Series B will invest in
lower rated securities and unrated securities of comparable quality, the
achievement of the Series' investment objective may be more dependent on the
Investment Manager's own credit analysis than would be the case if investing in
higher rated securities.
For the year ended December 31, 1996, the dollar weighted average of
Series B's holdings (excluding equities) had the following credit quality
characteristics.

Investment Percent of Net Assets
---------- ---------------------
U.S. Government Securities ................ 0%
Cash and Other Assets, Less Liabilities ... 5.8%
Rated Fixed Income Securities
A...................................... 0%
Baa/BBB ............................... 0.5%
Ba/BB ................................. 10.8%
B...................................... 8.0%
Caa/CCC ............................... 0%
Unrated Securities Comparable in Quality to
A...................................... 0%
Ba/BB ................................. 0%
B...................................... 0%
Caa/CCC................................ 0%
------
Total...................................... 25.1%

The above table is intended solely to provide disclosure about the Series'
asset composition during the year ended December 31, 1996. The asset
composition after this may or may not be approximately the same as shown above.
As discussed above, Series B may invest in foreign debt securities that
are denominated in U.S. dollars. Such foreign debt securities may include debt
of foreign governments, including Brady Bonds, and debt of foreign
corporations. The Series expects to limit its investment in foreign debt
securities, excluding Canadian securities, to not more than 15 percent of its
total assets and its investment in debt securities of issuers in emerging
markets, excluding Brady Bonds, to not more than 5 percent of its net assets.
See the discussion of the risks associated with investing in foreign securities
and Brady Bonds under "Investment Methods and Risk Factors" -- "Emerging
Markets Risks," "Foreign Investment Risks" and "Brady Bonds."
For a detailed discussion of risks associated with high yield investing,
zero coupon securities and ADRs, respectively, see "Investment Methods and Risk
Factors" -- "Risks Associated with Investments in High-Yield Lower-Rated Debt
Securities," "zero coupon securities" and "American Depositary Receipts
(ADRs)." The Series may purchase securities that are restricted as to
disposition under the federal securities laws, provided that such securities
are eligible for resale to qualified institutional investors pursuant to Rule
144A under the Securities Act of 1933 and subject to the Series' policy that
not more than 10 percent of its total assets will be invested in illiquid
securities. See "Investment Methods and Risk Factors" -- "Restricted
Securities."

SERIES C (MONEY MARKET SERIES)

The investment objective of Series C is to seek as high a level of current
income as is consistent with preservation of capital, similar to the objective
associated with a "money market" fund or series. The Series will attempt to
achieve its objective by investing at least 95 percent of its total assets,
measured at the time of investment, in a diversified portfolio of highest
quality money market instruments (e.g., instruments rated Aaa or Prime-1 by
Moody's or AAA or A-1 by S&P or unrated securities that are determined to be of
equivalent quality by the Investment Manager under procedures adopted by the
Fund's Board of Directors). Series C may also invest up to 5 percent of its
total assets, measured at the time of investment, in money market instruments
that are in the second-highest rating category for short-term debt obligations
(e.g., instruments rated Aa or Prime-2 by Moody's or AA or A-2 by S&P). Series
C will purchase only securities that the Investment Manager determines present
minimal credit risk under procedures adopted by the Fund's Board of Directors
and that satisfy the quality requirements of Rule 2a-7 under the Investment
Company Act of 1940 (the "1940 Act"). The Series may invest in money market
instruments with varying maturities (but not longer than thirteen months),
consisting of obligations issued or guaranteed (as to principal or interest) by
the United States Government or its agencies (such as the Federal Housing
Administration and Government National

7
<PAGE>

Mortgage Association), or instrumentalities (such as Federal Home Loan Banks
and Federal Land Banks) (see the Statement of Additional Information for a
description of the differing levels of guarantees associated with these types
of securities) and instruments fully collateralized with such obligations such
as repurchase agreements; obligations of banks or savings and loan associations
that are members of the Federal Deposit Insurance Corporation, and instruments
fully collateralized with such obligations such as repurchase agreements (the
additional risks involved in such agreements are discussed under "Investment
Methods and Risk Factors"); or commercial paper issued by corporations or other
corporate debt instruments, subject to the limitations on investment in
instruments in the second-highest rating category, discussed above. The
Statement of Additional Information contains a description of commercial paper
and corporate bond ratings.
Series C may invest in instruments having rates of interest that are
adjusted periodically according to a specified market rate for such investments
("Variable Rate Instruments"). The interest rate on Variable Rate Instruments
is ordinarily determined by reference to, or is a percentage of, an objective
standard such as a bank's prime rate or the 91-day U.S. Treasury Bill rate.
Generally, the changes in the interest rate on Variable Rate Instruments reduce
the fluctuation in the market value of such securities. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
depreciation is less than for fixed-rate obligations. Series C determines the
maturity of Variable Rate Instruments in accordance with Rule 2a-7 under the
1940 Act which allows the Series to consider the maturity date of such
instruments to be the period remaining until the next readjustment of the
interest rate rather than the maturity date on the face of the instrument.
Certain of the securities purchased by Series C may be restricted as to
disposition under the federal securities laws provided that such securities are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933 and subject to the Series' policy that not
more than 10 percent of total assets will be invested in illiquid securities.
See the description of such securities under "Investment Methods and Risk
Factors" -- "Restricted Securities."
Investment in Series C involves minimal market risk and, to reduce the
effect of fluctuating interest rates on the net asset value of its shares,
Series C intends to maintain a dollar weighted average maturity in its
portfolio of not more than 90 days. In addition to general market risks, Series
C investments in non-government obligations are subject to the ability of the
issuer to satisfy its obligations. The Statement of Additional Information
contains a description of the principal types of securities and instruments in
which Series C will invest.

SERIES D (WORLDWIDE EQUITY SERIES)

The investment objective of Series D is to seek long-term growth of
capital primarily through investment in common stocks and equivalents of
companies domiciled in foreign countries and the United States. Series D will
seek to achieve its objective through investment in a diversified portfolio of
securities which will consist primarily of various types of common stocks and
equivalents (the following constitute equivalents: convertible debt
securities, warrants and options). The Series may also invest in preferred
stocks, bonds and other debt obligations, which include money market
instruments of foreign and domestic companies and the U.S. Government and
foreign governments, governmental agencies and international organizations.
Series D will at all times invest at least 65 percent or more of its
assets in at least three countries, one of which may be the United States. The
Series is not required to maintain any particular geographic or currency mix of
its investments, nor is it required to maintain any particular proportion of
stocks, bonds or other securities in its portfolio. Series D may invest
substantially or primarily in foreign debt securities when it appears that the
capital appreciation available from investments in such securities will equal
or exceed the capital appreciation available from investments in equity
securities. Because the market value of debt obligations can be expected to
vary inversely to changes in prevailing interest rates, investing in debt
obligations may provide an opportunity for capital appreciation when interest
rates are expected to decline. When a defensive position is deemed advisable in
the judgment of the Series' Sub-Adviser, Lexington Management Corporation
("Lexington"), Series D may temporarily invest up to 100 percent of its assets
in debt obligations consisting of repurchase agreements, money market
instruments of foreign or domestic companies and the U.S. Government and
foreign governments, governmental and international organizations. The Series
will be moved into a defensive position when, in the judgment of Lexington,
conditions in the securities markets would make pursuing the Series' basic
investment strategy inconsistent with the best interests of the shareholders.
Series D is intended to provide investors with the opportunity to invest
in a portfolio of securities of companies and governments located throughout
the world. In making the allocation of assets among the various countries and
geographic regions, Lexington ordinarily considers such factors as prospects
for relative economic growth between the U.S and other countries; expected
levels of inflation and interest rates; government policies influencing
business conditions; the range of investment opportunities available to
international investors; and other pertinent financial, tax, social and
national factors--all in relation to the prevailing prices of the securities in
each country or region.
Investments may be made in companies based in (or governments of or
within) such areas and countries as Lexington may determine from time to time.
Series D may

8
<PAGE>

invest in companies located in developing countries without limitation. See the
discussion of risks associated with investment in securities of foreign issuers
under "Investment Methods and Risk Factors" -- "Currency Risk," "Foreign
Investment Risks" and "Emerging Markets Risks."
Although the Series does not intend to invest for the purpose of seeking
short-term profits, the Series' investments may be changed whenever Lexington
deems it appropriate to do so, without regard to the length of time a
particular security has been held. Series D may enter into forward foreign
currency exchange contracts and may purchase or sell foreign currencies on a
"spot" (i.e., cash) basis. Series D may enter into such forward contracts to
hedge certain of its portfolio positions when Lexington deems it appropriate to
limit or reduce exposure in a foreign currency in order to moderate potential
changes in the United States dollar value of the portfolio. The Series may also
enter into forward currency exchange contracts to increase its exposure to a
foreign currency that Lexington expects to increase in value relative to the
United States dollar. Series D will not attempt to hedge all of its portfolio
positions. Series D intends to limit portfolio hedging transactions to not more
than 70 percent of its total assets. See the discussion of "Forward Currency
Transactions" under "Investment Methods and Risk Factors."
Series D may from time to time employ or enter into the following
investment practices. Series D may make contracts to purchase securities for a
fixed price at a future date beyond customary settlement time ("forward
commitments"), because new issues of securities are typically offered to
investors on that basis. See the discussion of forward commitments under
"Investment Methods and Risk Factors." Series D may write covered call options.
Such an option on an underlying portfolio security would obligate the Series to
sell, and give the purchaser of the option the right to buy, that security at a
stated exercise price at any time until the stated expiration date of the
option. The Series may purchase securities that are restricted as to
disposition under the federal securities laws, provided that such securities
are eligible for resale to qualified institutional investors pursuant to Rule
144A under the Securities Act of 1933 and subject to the Series' policy that
not more than 10 percent of its total assets will be invested in illiquid
securities. See the discussion of restricted securities under "Investment
Methods and Risk Factors." The Series may enter into repurchase agreements
which are described under "Investment Methods and Risk Factors." Series D may
also invest in real estate investment trusts (REITs) which are described under
"Investment Methods and Risk Factors."

SERIES E (HIGH GRADE INCOME SERIES)

9
<PAGE>

the agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
Although U.S. Government securities are guaranteed by the U.S. Government, its
agencies or instrumentalities, shares of the Fund are not so guaranteed in any
way. The diversification rules under Section 817(h) of the Internal Revenue
Code limit the ability of Series E to invest more than 55 percent of its assets
in the securities of any one U.S. Government agency or instrumentality.
Series E may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or a province thereof, and Canadian corporate debt
securities. Canadian securities will not be purchased if subject to the foreign
interest equalization tax and unless payable in U.S. dollars. Series E may
invest in Yankee CDs which are certificates of deposit issued by a U.S. branch
of a foreign bank denominated in U.S. dollars and held in the U.S. Yankee CDs
are subject to somewhat different risks than are the obligations of domestic
banks. The Series also may invest in debt securities issued by foreign
governments, their agencies and instrumentalities and foreign corporations,
provided that such securities are denominated in U.S. dollars. The Series'
investment in foreign securities, including Canadian securities, will not
exceed 25 percent of the Series' net assets. See "Investment Methods and Risk
Factors" for a discussion of the risks associated with investing in foreign
securities.
Series E may invest in investment grade mortgage backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Series may invest up to 10 percent of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
or "interest-only" (IO) or "principal-only" (PO) bonds, the market values of
which generally will be more volatile than the market values of most MBSs. The
Series will hold less than 25 percent of its net assets in MBSs. For a
discussion of MBSs and the risks associated with such securities, see
"Investment Methods and Risk Factors."
For the year ended December 31, 1996, the dollar weighted average of
Series E's holdings (excluding equities) had the following credit quality
characteristics.

Investment Percent of Net Assets
---------- ---------------------
U.S. Government Securities ................ 17.1%
Cash and Other Assets, Less Liabilities ... 4.5%
Rated Fixed Income Securities
AAA.................................... 3.2%
AA..................................... 5.1%
A...................................... 35.7%
Baa/BBB................................ 14.6%
Ba/BB.................................. 12.9%
B...................................... 6.9%
Caa/CCC................................ 0%
Unrated Securities Comparable in Quality to
A...................................... 0%
Ba/BB.................................. 0%
B...................................... 0%
Caa/CCC................................ 0%
-----
Total...................................... 100%

The above table is intended solely to provide disclosure about the Series'
asset composition during the year ended December 31, 1996. The asset
composition after this may or may not be approximately the same as shown above.
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
The Series may acquire certain securities that are restricted as to
disposition under federal securities laws, including securities eligible for
resale to qualified institutional investors pursuant to Rule 144A under the
Securities Act of 1933, subject to the Series' policy that not more than 15
percent of the Series' net assets will be invested in illiquid assets. See
"Investment Methods and Risk Factors" for a discussion of restricted
securities.
Series E may purchase securities on a "when issued" or "delayed delivery"
basis in excess of customary settlement periods for the types of security
involved. For a discussion of such securities, see "Investment Methods and Risk
Factors."
Series E may, for defensive purposes, invest part or all of its assets in
money market instruments such as those appropriate for investment by Series C.

SERIES J (EMERGING GROWTH SERIES)

The investment objective of Series J is to seek capital appreciation by
investing in a diversified portfolio of common stocks (which may include ADRs),
preferred stocks, debt securities, and securities convertible into common
stocks. On a temporary basis, there may be times when Series J may invest its
assets in cash or money market instruments for defensive purposes.
Securities selected for their appreciation possibilities will be primarily
common stocks or other securities having the investment characteristics of
common stocks, such as

10
<PAGE>

securities convertible into common stocks. Securities will be selected on the
basis of their appreciation and growth potential. Current income will not be a
factor in selecting investments, and any such income should be considered
incidental. Securities considered to have capital appreciation and growth
potential will often include securities of smaller and less mature companies.
Such companies may present greater opportunities for capital appreciation
because of high potential earnings growth, but may also involve greater risk.
They may have limited product lines, markets or financial resources, and they
may be dependent on a limited management group. Their securities may trade less
frequently and in limited volume, and only in the over-the-counter market or on
smaller securities exchanges. As a result, the securities of smaller companies
may have limited marketability and may be subject to more abrupt or erratic
changes in value than securities of larger, more established companies.
Series J may also invest in larger companies where opportunities for
above-average capital appreciation appear favorable.
Series J may purchase securities on a "when issued" or "delayed delivery"
basis as described under "Investment Methods and Risk Factors." The Series may
enter into futures contracts (and options thereon) to hedge all or a portion of
its portfolio, or as an efficient means of adjusting its exposure to the stock
market. The Series will not use futures contracts for leveraging purposes. The
Series will limit its use of futures contracts so that initial margin deposits
or premiums on such contracts used for non-hedging purposes will not equal more
than 5 percent of the Series' net asset value. Futures contracts (and options
thereon) and the risks associated with such instruments are described in
further detail under "Investment Methods and Risk Factors."
In seeking capital appreciation, Series J may, during certain periods,
trade to a substantial degree in securities for the short term. That is, the
Series may be engaged essentially in trading operations based on short-term
market considerations, as distinct from long-term investments based on
fundamental evaluations of securities. This investment policy is speculative
and involves substantial risk.

SERIES K (GLOBAL AGGRESSIVE BOND SERIES)

The primary investment objective of Series K is to seek to provide high
current income. Capital appreciation is a secondary objective. As used herein,
the term "bond" is used to describe any type of debt security. Under normal
circumstances, the Series will invest at least 65 percent of its total assets
in bonds as defined herein. The Series under normal circumstances invests
substantially all of its assets in a portfolio of debt securities of issuers in
three separate investment areas: (i) the United States; (ii) developed foreign
countries; and (iii) emerging markets. The Series selects particular debt
securities in each sector based on their relative investment merits. Within
each area, the Series selects debt securities from those issued by governments,
their agencies and instrumentalities; central banks; commercial banks and other
corporate entities. Debt securities in which the Series may invest consist of
bonds, notes, debentures and other similar instruments. The Series may invest
up to 100 percent of its total assets in U.S. and foreign debt securities and
other fixed income securities that, at the time of purchase, are rated below
investment grade ("high yield securities" or "junk bonds"), which involve a
high degree of risk and are predominantly speculative. The Series may also
invest in securities that are in default as to payment of principal and/or
interest. See "Investment Methods and Risk Factors" -- "Risks Associated with
Investments in High-Yield Lower-Rated Debt Securities." Many emerging market
debt securities are not rated by United States rating agencies such as Moody's
and S&P. The Series' ability to achieve its investment objectives is thus more
dependent on the credit analysis of the Series' Sub-Advisers, Lexington and MFR
Advisors, Inc. ("MFR"), than would be the case if the Series were to invest in
higher quality bonds. Investors should purchase shares only as a supplement to
an overall investment program and only if willing to undertake the risks
involved.
For the year ended December 31, 1996, the dollar weighted average of
Series K's holdings (excluding equities) had the following credit quality
characteristics.

Investment Percent of Net Assets
---------- ---------------------
U.S. Government Securities ................ 5.3%
Cash and other Assets, Less Liabilities ... 0.1%
Rated Fixed Income Securities
AAA.................................... 15.6%
AA..................................... 7.3%
A...................................... 14.9%
Baa/BBB................................ 21.9%
Ba/BB.................................. 11.9%
B ..................................... 23.0%
Caa/CCC ............................... 0%
Unrated Securities Comparable in Quality to
A...................................... 0%
Baa/BBB................................ 0%
Ba/BB.................................. 0%
B...................................... 0%
Caa/CCC................................ 0%
-------
Total...................................... 100.0%

The foregoing table is intended solely to provide disclosure about Series K's
asset composition during the year ended December 31, 1996. The asset
composition after this may or may not be approximately the same as shown above.
"Emerging markets" will consist of all countries determined by the World
Bank or the United Nations to have developing or emerging economies and
markets. Currently, investing in many of the emerging countries and emerging
markets is not feasible or may involve political risks. Accordingly, Lexington
currently intends to consider investments only in those countries in which it
believes

11
<PAGE>

investing is feasible. The list of acceptable countries will be reviewed by
Lexington and MFR and approved by the Fund's Board of Directors on a periodic
basis and any additions or deletions with respect to such list will be made in
accordance with changing economic and political circumstances involving such
countries. An issuer in an emerging market is an entity: (i) for which the
principal securities trading market is an emerging market, as defined above;
(ii) that (alone or on a consolidated basis) derives 50 percent or more of its
total revenue from either goods produced, sales made or services performed in
emerging markets; or (iii) organized under the laws of, and with a principal
office in, an emerging market.
Because of the special risks associated with investing in emerging
markets, an investment in the Series should be considered speculative.
Investors are strongly advised to consider carefully the special risks involved
in emerging markets which are in addition to the usual risks of investing in
developed foreign markets around the world. See the discussion of the risks of
investing in emerging markets under "Investment Methods and Risk Factors" --
"Emerging Markets Risks."
The Series' investments in emerging market securities consist
substantially of high yield, lower-rated debt securities of foreign
corporations, "Brady Bonds" and other sovereign debt securities issued by
emerging market governments. "Sovereign debt securities" are those issued by
emerging market governments that are traded in the markets of developed
countries or groups of developed countries. The Series may invest in debt
securities of emerging market issuers without regard to ratings. Currently, the
substantial majority of emerging market debt securities are considered to have
a credit quality below investment grade. Series K also may acquire lower
quality debt securities during an initial underwriting or may acquire lower
quality debt securities which are sold without registration under applicable
securities laws. Such securities involve special considerations and risks. The
Series may invest in bank loan participations and assignments, which are fixed
and floating rate loans arranged through private negotiations between foreign
entities. For a more detailed discussion of these instruments and the risks
associated with investing therein, see "Sovereign Debt," "Loan Participations
and Assignments" and "Brady Bonds" under "Investment Methods and Risk Factors."
The Series intends to retain the flexibility to respond promptly to
changes in market and economic conditions. Accordingly, in the interest of
preserving shareholders' capital and consistent with the Series' investment
objectives, Lexington and MFR may employ a temporary defensive investment
strategy if they determine such a strategy to be warranted. Pursuant to such a
defensive strategy, the Series temporarily may hold cash (U.S. dollars, foreign
currencies or multinational currency units) and/or invest up to 100 percent of
its assets in high quality debt securities or money market instruments of U.S.
or foreign issuers, and most or all of the Series' investments may be made in
the United States and denominated in U.S. dollars. For debt obligations other
than commercial paper, this includes securities rated, at the time of purchase,
at least AA by S&P or Aa by Moody's, or if unrated, determined to be of
comparable quality by Lexington or MFR. For commercial paper, this includes
securities rated, at the time of purchase, at least A-2 by S&P or Prime-2 by
Moody's, or if unrated, determined to be of comparable quality by Lexington or
MFR. It is impossible to predict whether, when or for how long the Series will
employ defensive strategies. To the extent the Series adopts a temporary
defensive investment posture, it will not be invested so as to achieve directly
its investment objectives. In addition, pending investment of proceeds from new
sales of Series shares or to meet ordinary daily cash needs, the Series
temporarily may hold cash (U.S. dollars, foreign currencies or multinational
currency units) and may invest any portion of its assets in high quality
foreign or domestic money market instruments.
The Series invests in debt obligations allocated among diverse markets and
denominated in various currencies, including U.S. dollars, or in multinational
currency units such as European Currency Units. The Series may purchase
securities that are issued by the government or a company or financial
institution of one country but denominated in the currency of another country
(or a multinational currency unit). The Series is designed for investors who
wish to accept the risks entailed in such investments, which are different from
those associated with a portfolio consisting entirely of securities of U.S.
issuers denominated in U.S. dollars. See "Investment Methods and Risk Factors"
- -- "Currency Risk" and "Foreign Investment Risks."
Lexington and MFR will seek to allocate the assets of the Series in
securities of issuers in countries and in currency denominations where the
combination of fixed income market returns, the price appreciation potential of
fixed income securities and currency exchange rate movements will present
opportunities primarily for high current income and secondarily for capital
appreciation. In so doing, Lexington and MFR intend to take full advantage of
the different yield, risk and return characteristics that investment in the
fixed income markets of different countries can provide for U.S. investors.
Fundamental economic strength, credit quality and currency and interest rate
trends will be the principal determinants of the emphasis given to various
country, geographic and industry sectors within the Series. Securities held by
the Series may be invested in without limitation as to maturity. Lexington and
MFR evaluate currencies on the basis of fundamental economic criteria (e.g.,
relative inflation and interest rate levels and trends, growth rate forecasts,
balance of payments status and economic policies) as well as technical and
political data. If the currency in which a security is denominated appreciates
against the U.S. dollar, the dollar value of the security will increase.
Conversely, if the exchange rate of the foreign currency declines, the dollar
value of the security will

12
<PAGE>

decrease. The Series may seek to protect itself against such negative currency
movements through the use of sophisticated investment techniques, although the
Series is not committed to using such techniques and may be fully exposed to
changes in currency exchange rates.
In seeking to protect against currency exchange rate or interest rate
changes that are adverse to its present or prospective positions, the Series
may employ certain risk management practices involving the use of forward
currency contracts and options contracts, futures contracts and options on
futures contracts on U.S. and foreign government securities and currencies. The
Series may purchase call and put options and write such options on a "covered"
basis. The Series also may enter into interest rate currency and index swaps
and purchase or sell related caps, floors and collars and other derivatives.
The Series may enter into derivatives securities transactions without limit.
See the discussion of "Forward Currency Transactions," "Options," "Futures
Contracts and Related Options," and "Swaps, Caps, Floors and Collars" under
"Investment Methods and Risk Factors." There can be no assurance that the
Series' risk management practices will succeed. Only a limited market, if any,
currently exists for forward currency contracts and options and futures
instruments relating to currencies of most emerging markets, to securities
denominated in such currencies or to securities of issuers domiciled or
principally engaged in business in such emerging markets.
The Series may acquire certain securities that are restricted as to
disposition under federal securities laws, including securities eligible for
resale to qualified institutional investors pursuant to Rule 144A under the
Securities Act of 1933, subject to the Series policy that no more than 15
percent of the Series' net assets will be invested in illiquid assets. See
"Investment Methods and Risk Factors" for a discussion of restricted
securities. The Series may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis in order to
hedge against anticipated changes in interest rates and prices. See the
discussion of when-issued and forward commitment securities under "Investment
Methods and Risk Factors." The Series may enter into repurchase agreements,
reverse repurchase agreements and "dollar rolls" which are discussed under
"Investment Methods and Risk Factors." Series K may invest up to 5 percent of
its total assets in zero coupon securities. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.

SERIES M (SPECIALIZED ASSET ALLOCATION SERIES)

The investment objective of Series M is to seek high total return,
consisting of capital appreciation and current income. The Series seeks this
objective by following an asset allocation strategy that contemplates shifts
among a wide range of investment categories and market sectors. The Series will
invest in the following investment categories: equity securities of domestic
and foreign issuers, including common stocks, ADRs, preferred stocks,
convertible securities and warrants; debt securities of domestic and foreign
issuers, including mortgage-related and other asset-backed securities;
exchange-traded real estate investment trusts (REITs); equity securities of
companies involved in the exploration, mining, development, production and
distribution of gold ("gold stocks"); zero coupon securities and domestic money
market instruments. See "Investment Methods and Risk Factors" for a discussion
of the additional risks associated with investment in foreign securities and
REITs and see the discussion of the risks associated with investment in gold
stocks below.
Investment in gold stocks presents risks, because the prices of gold have
fluctuated substantially over short periods of time. Prices may be affected by
unpredictable monetary and political policies, such as currency devaluations or
revaluations, economic and social conditions within an individual country,
trade imbalances, or trade or currency restrictions between countries. The
unstable political and social conditions in South Africa and unsettled
political conditions prevailing in neighboring countries may have disruptive
effects on the market prices of securities of South African companies.
The Series is not required to maintain a portion of its assets in each of
the permitted investment categories. The Series, however, under normal
circumstances will maintain a minimum of 35 percent of its total assets in
equity securities and 10 percent in debt securities. The Series will not invest
more than 55 percent of its total assets in money market instruments (except
when in a temporary defensive position), more than 80 percent of its total
assets in foreign securities, nor more than 20 percent of its total assets in
gold stocks.
The Series Sub-Adviser, Meridian Investment Management Corporation
("Meridian"), conducts quantitative investment research and uses the research
to strategically allocate the Series' assets among the investment categories
identified above, primarily on the basis of a quantitative asset allocation
model. With respect to equity securities, the model analyzes a large number of
equity securities based on the following factors: current earnings, earnings
history, long-term earnings projections, current price, and risk.
Meridian then determines which sectors within an identified investment
category are deemed to be the most attractive relative to other sectors. For
example, the model may indicate that a portion of the Series' assets should be
invested in the domestic equity category of the market and within this category
that pharmaceutical stocks represent a sector with an attractive total return
potential.
Meridian identifies sectors of the domestic and international economy in
which the Series will invest and then determines which equity securities to
purchase within the identified countries and/or sectors.
With respect to the selection of debt securities for the Series, the asset
allocation model provided by Meridian analyzes the prices of commodities and
finished goods to arrive at an interest rate projection. The Investment Manager

13
<PAGE>

will determine the portion of the portfolio to allocate to debt securities and
the duration of those securities based on the model's interest rate
projections. Gold stocks and REITs will be analyzed in a manner similar to that
used for equity securities. Money market instruments will be analyzed based on
current returns and the current yield curve. The asset allocation model and
stock selection techniques used by the Series may evolve over time or be
replaced by other asset allocation models and/or stock selection techniques.
There is no assurance that the model will correctly predict market trends or
enable the Series to achieve its investment objective.
The debt securities in which the Series may invest will, at the time of
investment, consist of "investment grade" bonds, which are bonds rated BBB or
better by S&P or Baa or better by Moody's or that are unrated by S&P and
Moody's but considered by the Investment Manager to be of equivalent credit
quality. Securities rated BBB by S&P or Baa by Moody's have speculative
characteristics and may be more susceptible than higher grade bonds to adverse
economic conditions or other adverse circumstances which may result in a
weakened capacity to make principal and interest payments.
The Series may invest in investment grade mortgage-backed securities
(MBSs), including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Series will not invest in an MBS if, as a result of
such investment, more than 25 percent of its total assets would be invested in
MBSs, including CMOs and mortgage pass-through securities. For a discussion of
MBSs and the risks associated with such securities, see "Investment Methods and
Risk Factors" -- "Mortgage-Backed Securities," below.
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
The Series may write covered call options and purchase put options on
securities, financial indices and foreign currencies, and may enter into
futures contracts. The Series may buy and sell futures contracts (and options
on such contracts) to manage exposure to changes in securities prices and
foreign currencies and as an efficient means of adjusting overall exposure to
certain markets. It is the Series' operating policy that initial margin
deposits and premiums on options used for non-hedging purposes will not equal
more than 5 percent of the Series' net assets. The total market value of
securities against which the Series has written call options may not exceed 25
percent of its total assets. The Series will not commit more than 5 percent of
its total assets to premiums when purchasing put options. Futures contracts and
options may not always be successful hedges and their prices can be highly
volatile. Using futures contracts and options could lower the Series' total
return and the potential loss from the use of futures can exceed the Series'
initial investment in such contracts. Futures contracts and options and the
risks associated with such instruments are described in further detail under
"Investment Methods and Risk Factors."

SERIES N (MANAGED ASSET ALLOCATION SERIES)

The investment objective of Series N is to seek a high level of total
return by investing primarily in a diversified portfolio of fixed income and
equity securities.
The Series is designed to balance the potential appreciation of common
stocks with the income and principal stability of bonds over the long term.
Over the long term, the Series expects to allocate its assets so that
approximately 40 percent of such assets will be in the fixed income sector (as
defined below) and approximately 60 percent in the equity sector (as defined
below). Under normal market conditions, this mix may vary over shorter time
periods within the ranges set forth below:

Range
------
Fixed Income Sector 30-50%
Equity Sector 50-70%

The primary consideration in varying from the 60-40 allocation will be the
outlook of the Series' Sub-Adviser, T. Rowe Price Associates, Inc. ("T. Rowe
Price"), for the different markets in which the Series invests. Shifts between
the fixed income and equity sectors will normally be done gradually and T. Rowe
Price will not attempt to precisely "time" the market. There is, of course, no
guarantee that T. Rowe Price's gradual approach to allocating the Series'
assets will be successful in achieving the Series' objective. The Series will
maintain cash reserves to facilitate the Series' cash flow needs (redemptions,
expenses and purchases of Series securities) and it may invest in cash reserves
without limitation for temporary defensive purposes.
Assets allocated to the fixed income portion of the Series will be
invested primarily in U.S. and foreign investment grade bonds, high yield
bonds, short-term investments and currencies, as needed to gain exposure to
foreign markets. Assets allocated to the equity portion of the Series primarily
will be invested in the common stocks of a diversified group of U.S. and
foreign large and small companies, currencies, as needed to gain exposure to
foreign markets, and futures contracts.
The Series' fixed income sector will be allocated among investment grade,
high yield, U.S. and non-dollar debt securities and currencies generally within
the ranges indicated below:

Range
------
Investment Grade 50-100%
High Yield 0-30%
Non-dollar 0-30%
Cash Reserves 0-20%

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<PAGE>

Investment grade debt securities include long, intermediate and short-term
investment grade debt securities (e.g., AAA, AA, A or BBB by S&P or if not
rated, of equivalent investment quality as determined by T. Rowe Price). The
weighted average maturity for this portion (investment grade debt securities)
of the Series portfolio is generally expected to be intermediate (3-10 years),
although it may vary significantly. Non-dollar debt securities include
non-dollar denominated government and corporate debt securities or currencies
of at least three countries. See "Investment Methods and Risk Factors" --
"Foreign Investment Risks" and "Currency Risk" and the Statement of Additional
Information for a discussion of the risks involved in foreign investing.
High-yield securities include high-yielding, income-producing debt securities
in the lower rating categories (commonly referred to as "junk bonds") and
preferred stocks including convertible securities. High yield bonds may be
purchased without regard to maturity; however, the average maturity is expected
to be approximately 10 years, although it may vary if market conditions
warrant. Quality will generally range from lower-medium to low and the Series
may also purchase bonds in default if, in the opinion of T. Rowe Price, there
is significant potential for capital appreciation. Lower-rated debt obligations
are generally considered to be high risk investments. See "Investment Methods
and Risk Factors" -- "Risks Associated with High-Yield Lower-Rated Debt
Securities" and the Statement of Additional Information for a discussion of the
risks involved in investing in high-yield, lower-rated debt securities.
Securities which may be held as cash reserves include liquid short-term
investments of one year or less having the highest ratings by at least one
established rating organization, or if not rated, of equivalent investment
quality as determined by T. Rowe Price. The Series may use currencies to gain
exposure to an international market prior to investing in non-dollar
securities.
For the year ended December 31, 1996, the dollar weighted average of
Series N's holdings (excluding equities) had the following credit quality
characteristics.

Investment Percent of Net Assets
---------- ---------------------
U.S. Government Securities ................ 20.4%
Liabilities, Less Cash and other Assets ... (0.1)%
Rated Fixed Income Securities
AAA.................................... 3.0%
AA..................................... 1.5%
A...................................... 2.6%
Baa/BBB................................ 1.8%
Ba/BB.................................. 2.8%
B ..................................... 5.6%
Caa/CCC................................ 0.1%
Unrated Securities Comparable in Quality to
A...................................... 0%
Baa/BBB................................ 0%
Ba/BB.................................. 0%
B...................................... 0%
Caa/CCC................................ 0%
------
Total...................................... 37.7%

The foregoing table is intended solely to provide disclosure about Series N's
asset composition during the year ended December 31, 1996. The asset
composition after this may or may not be approximately the same as shown above.
The Series' equity sector will be allocated among large and small capital
("Large Cap" and "Small Cap" respectively) U.S. and non-dollar equity
securities, currencies and futures, generally within the ranges indicated
below:

Range
------
Large Cap 45-100%
Small Cap 0-30%
Non-dollar 0-35%

Large Cap securities generally include stocks of well-established
companies with capitalization over $1 billion which can produce increasing
dividend income.
Non-dollar securities include foreign currencies and common stocks of
established non-U.S. companies. Investments may be made solely for capital
appreciation or solely for income or any combination of both for the purpose of
achieving a higher overall return. T. Rowe Price intends to diversify the
non-dollar portion of the Series' portfolio broadly among countries and to
normally have at least three different countries represented. The countries of
the Far East and Western Europe as well as South Africa, Australia, Canada, and
other areas (including developing countries) may be included. Under unusual
circumstances, however, investment may be substantially in one or two
countries.
Futures may be used to gain exposure to equity markets where there is
insufficient cash to purchase a diversified portfolio of stocks. Currencies may
also be held to gain exposure to an international market prior to investing in
a non-dollar stock.

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<PAGE>

Small Cap securities include common stocks of small companies or companies
which offer the possibility of accelerated earnings growth because of
rejuvenated management, new products or structural changes in the economy.
Current income is not a factor in the selection of these stocks. Higher risks
are often associated with small companies. These companies may have limited
product lines, markets and financial resources, or they may be dependent on a
small or inexperienced management group. In addition, their securities may
trade less frequently and in limited volume and move more abruptly than
securities of larger companies. However, securities of smaller companies may
offer greater potential for capital appreciation since they are often
overlooked or undervalued by investors.
Until the Series reaches approximately $30 million in assets, the
composition of the Series' portfolio may vary significantly from the percent
limitations and ranges above. This might occur because, at lower asset levels,
the Series may be unable to prudently achieve diversification among the
described asset classes. During this initial period, the Series may use futures
contracts and purchase foreign currencies to a greater extent than it will once
the start-up period is over.
The Series may invest up to 35 percent of its total assets in U.S.
dollar-denominated and non-U.S. dollar-denominated securities issued by foreign
issuers. Some of the countries in which the Series may invest may be considered
to be developing and may involve special risks. For a discussion of the risks
involved in investment in foreign securities, including investment in emerging
markets, see "Investment Methods and Risk Factors" -- "Foreign Investment
Risks" and "Emerging Markets Risks."
The Series' foreign investments are also subject to currency risk
described under "Investment Methods and Risk Factors" -- "Currency Risk." To
manage this risk and facilitate the purchase and sale of foreign securities,
the Series may engage in foreign currency transactions involving the purchase
and sale of forward foreign currency exchange contracts. Although forward
currency transactions will be used primarily to protect the Series from adverse
currency movements, they also involve the risk that anticipated currency
movements will not be accurately predicted and the Series' total return could
be adversely affected as a result. For a discussion of forward currency
transactions and the risks associated with such transactions, see "Investment
Methods and Risk Factors" -- "Forward Currency Transactions." Purchases by the
Series of currencies in substitution of purchases of stocks and bonds will
subject the Series to risks different from a fund invested solely in stocks and
bonds.
The Series' investments include, but are not limited to, equity and fixed
income securities of any type and the Series may utilize the investment methods
and investment vehicles described below.
The Series may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or currency exchange rates, or
as an efficient means of adjusting its exposure to the bond, stock, and
currency markets. The Series will not use futures contracts for leveraging
purposes. The Series will limit its use of futures contracts so that initial
margin deposits or premiums on such contracts used for non-hedging purposes
will not equal more than 5 percent of the Series' net asset value. The Series
may also write call and put options on a covered basis and purchase put and
call options on securities, financial indices, and currencies. The aggregate
market value of the Series' portfolio securities or currencies covering call or
put options will not exceed 25 percent of the Series' net assets. The Series
may enter into foreign futures and options transactions. See the discussion of
options and futures contracts under "Investment Methods and Risk Factors." As
part of its investment program and to maintain greater flexibility, the Series
may invest in instruments which have the characteristics of futures, options
and securities, known as "hybrid instruments." For a discussion of such
instruments and the risks involved in investing therein, see "Investment
Methods and Risk Factors" -- "Hybrid Instruments."
The Series may acquire illiquid securities in an amount not exceeding 15
percent of net assets. Because an active trading market does not exist for such
securities the sale of such securities may be subject to delay and additional
costs. The Series will not invest more than 5 percent of its total assets in
restricted securities (other than securities eligible for resale under Rule
144A of the Securities Act of 1933). Series N may invest in securities on a
"when issued" or "delayed delivery basis" in excess of customary settlement
periods for the type of security involved. For a discussion of restricted and
when issued securities, see "Investment Methods and Risk Factors."
The Series may invest in asset-backed securities, which securities involve
certain risks. For a discussion of asset-backed securities and the risks
involved in investment in such securities, see the discussion under "Investment
Methods and Risk Factors." The Series may invest in mortgage-backed securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
or institutions such as banks, insurance companies and savings and loans. Some
of these securities, such as GNMA certificates, are backed by the full faith
and credit of the U.S. Treasury while others, such as Freddie Mac certificates,
are not. The Series may also invest in collateralized mortgage obligations
(CMOs) and stripped mortgage securities (a type of derivative). Stripped
mortgage securities are created by separating the interest and principal
payments generated by a pool of mortgage-backed bonds to create two classes of
securities, "interest only" (IO) and "principal only" (PO) bonds. There are
risks involved in mortgage-backed securities, CMOs and stripped mortgage
securities. See "Investment Methods and Risk Factors" for an additional
discussion of such securities and the risks involved therein.

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<PAGE>

The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
While the Series will remain invested in primarily common stocks and
bonds, it may, for temporary defensive purposes, invest in cash reserves
without limitation. The Series may establish and maintain reserves as T. Rowe
Price believes is advisable to facilitate the Series' cash flow needs. Cash
reserves include money market instruments, including repurchase agreements, in
the two highest categories. Short-term securities may be held in the equity
sector as collateral for futures contracts. These securities are segregated and
may not be available for the Series' cash flow needs.
The Series may invest in debt or preferred equity securities convertible
into or exchangeable for equity securities and warrants. As a fundamental
policy, for the purpose of realizing additional income, the Series may lend
securities with a value of up to 33 1/3 percent of its total assets to
broker-dealers, institutional investors, or other persons. Any such loan will
be continuously secured by collateral at least equal to the value of the
securities loaned. For a discussion of the limitations on lending and risks of
lending, see "Investment Methods and Risk Factors" -- "Lending of Portfolio
Securities." The Series may also invest in real estate investment trusts
(REITs). See "Investment Methods and Risk Factors" for a discussion of the
risks of investing in such securities.

SERIES O (EQUITY INCOME SERIES)

The investment objective of Series O is to seek to provide substantial
dividend income and also capital appreciation by investing primarily in
dividend-paying common stocks of established companies. In pursuing its
objective, the Series emphasizes companies with favorable prospects for
increasing dividend income, and secondarily, capital appreciation. Over time,
the income component (dividends and interest earned) of the Series' investments
is expected to be a significant contributor to the Series' total return. The
Series' income yield is expected to be significantly above that of the Standard
& Poor's 500 Stock Index ("S&P 500"). Total return will consist primarily of
dividend income and secondarily of capital appreciation (or depreciation).
The investment program of the Series is based on several premises. First,
the Series' Sub-Adviser, T. Rowe Price, believes that, over time, dividend
income can account for a significant component of the total return from equity
investments. Second, dividends are normally a more stable and predictable
source of return than capital appreciation. While the price of a company's
stock generally increases or decreases in response to short-term earnings and
market fluctuations, its dividends are generally less volatile. Finally, T.
Rowe Price believes that stocks which distribute a high level of current income
tend to have less price volatility than those which pay below average
dividends.
To achieve its objective, the Series, under normal circumstances, will
invest at least 65 percent of its assets in income-producing common stocks,
whose prospects for dividend growth and capital appreciation are considered
favorable by T. Rowe Price. To enhance capital appreciation potential, the
Series also uses a value-oriented approach, which means it invests in stocks it
believes are currently undervalued in the market place. The Series' investments
will generally be made in companies which share some of the following
characteristics: established operating histories; above-average current
dividend yields relative to the S&P 500; low price-earnings ratios relative to
the S&P 500; sound balance sheets and other financial characteristics; and low
stock price relative to the company's underlying value as measured by assets,
earnings, cash flow or business franchises.
The Series may also invest its assets in fixed income securities
(corporate, government, and municipal bonds of various maturities). The Series
would invest in municipal bonds when the expected total return from such bonds
appears to exceed the total returns obtainable from corporate or government
bonds of similar credit quality.
Series O may invest in debt securities of any type without regard to
quality or rating. Such securities would be purchased in companies which meet
the investment criteria for the Series. Such securities may include securities
rated below investment grade (e.g., securities rated Ba or lower by Moody's or
BB or lower by S&P). The Series will not purchase such a security (commonly
referred to as a "junk bond") if immediately after such purchase the Series
would have more than 10 percent of its total assets invested in such
securities. See "Investment Methods and Risk Factors" -- "Risks Associated with
Investment in High-Yield Lower-Rated Debt Securities" for a discussion of the
risks associated with investing in such securities.
Although the Series will invest primarily in U.S. common stocks, it may
also purchase other types of securities, for example, foreign securities,
convertible securities, real estate investment trusts (REITs) and warrants,
when considered consistent with the Series' investment objective and program.
See "Investment Methods and Risk Factors" -- "Real Estate Securities" for a
discussion of the risks of investing in such securities.
The Series' investments in foreign securities include non-dollar
denominated securities traded outside of the U.S. and dollar denominated
securities traded in the U.S. (such as ADRs). The Series may invest up to 25
percent of its total assets in foreign securities. See the discussion of the
risks associated with investing in foreign securities under "Investment Methods
and Risk Factors," "American Depositary Receipts (ADRs)," "Currency Risk" and
"Foreign Investment Risks."

17
<PAGE>

The Series may also engage in a variety of investment management
practices, such as buying and selling futures and options. The Series may buy
and sell futures contracts (and options on such contracts) to manage its
exposure to changes in securities prices and foreign currencies and as an
efficient means of adjusting its overall exposure to certain markets. The
Series may purchase, sell, or write call and put options on securities,
financial indices, and foreign currencies. The Series may write call and put
options only on a "covered" basis. It is the Series' operating policy that
initial margin deposits and premiums on options used for non-hedging purposes
will not equal more than 5 percent of the Series' net asset value and, with
respect to options on securities, the total market value of securities against
which the Series has written call or put options may not exceed 25 percent of
its total assets. The Series will not commit more than 5 percent of its total
assets to premiums when purchasing call or put options. The Series may also
invest up to 10 percent of its total assets in hybrid instruments which are
described under "Investment Methods and Risk Factors" -- "Hybrid Instruments."
Also see the discussion of "Forward Currency Transactions," "Futures Contracts
and Related Options" and "Options" under "Investment Methods and Risk Factors."
The Series may also invest in restricted securities described under
"Investment Methods and Risk Factors." The Series' investment in such
securities, other than Rule 144A securities, is limited to 5 percent of its net
assets. Series O may invest in securities on a "when issued" or "delayed
delivery basis" as discussed in "Investment Methods and Risk Factors." The
Series may borrow money as described under "Investment Methods and Risk
Factors" -- "Borrowing." The Series may not purchase securities when borrowings
exceed 5 percent of its total assets. The Series may hold a certain portion of
its assets in money market securities, including repurchase agreements, in the
two highest rating categories, maturing in one year or less. For temporary,
defensive purposes, the Series may invest without limitation in such
securities. The Series may lend securities to broker-dealers, other
institutions, or other persons to earn additional income. The value of loaned
securities may not exceed 33 1/3 percent of the Series' total assets. See
"Investment Methods and Risk Factors" -- "Lending of Portfolio Securities" for
a discussion of the risks associated with securities lending.

SERIES P (HIGH YIELD SERIES)

The investment objective of Series P is to seek high current income.
Capital appreciation is a secondary objective. Under normal circumstances, the
Series will seek its investment objective by investing primarily in a broad
range of income producing securities, including (i) higher yielding, higher
risk, debt securities (commonly referred to as "junk bonds"); (ii) preferred
stock; (iii) securities issued by foreign governments, their agencies and
instrumentalities, and foreign corporations, provided that such securities are
denominated in U.S. dollars; (iv) mortgage-backed securities ("MBSs"); (v)
asset-backed securities; (vi) securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (vii) securities issued
or guaranteed by, the Dominion of Canada or provinces thereof; and (viii) zero
coupon securities. The Series also may invest up to 35 percent of its assets in
common stock (which may include ADRs), warrants and rights. Under normal
circumstances, at least 65 percent of the Series' total assets will be invested
in high-yielding, high risk debt securities.
The Series may invest up to 100 percent of its assets in debt securities
that, at the time of purchase, are rated below investment grade ("high yield
securities" or "junk bonds"), which involve a high degree of risk and are
predominantly speculative. For a description of debt ratings and a discussion
of the risks associated with investing in junk bonds, see "Investment Methods
and Risk Factors" -- "Risks Associated With Investments In High-Yield Lower
Rated Debt Securities." Included in the debt securities which the Series may
purchase are convertible bonds, or bonds with warrants attached. A "convertible
bond" is a bond, debenture, or preferred share which may be exchanged by the
owner for common stock or another security, usually of the same company, in
accordance with the terms of the issue. A "warrant" confers upon the holder the
right to purchase an amount of securities at a particular time and price. See
"Investment Methods and Risk Factors" for a discussion of the risks associated
with such securities.
Series P may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. dollars. The
Series also may invest in debt securities issued by foreign governments
(including Brady Bonds), their agencies and instrumentalities and foreign
corporations (including those in emerging markets), provided such securities
are denominated in U.S. dollars. The Series' investment in foreign securities,
excluding Canadian securities, will not exceed 25 percent of the Series' net
assets. See "Investment Methods and Risk Factors" for a discussion of the risks
associated with investing in foreign securities, Brady Bonds and emerging
markets.
The Series may invest in MBSs, including mortgage pass-through securities
and collateralized mortgage obligations (CMOs). The Series may invest in
securities known as "inverse floating obligations," "residual interest bonds,"
and "interest only" (IO) and "principal only" (PO) bonds, the market values of
which generally will be more volatile than the market values of most MBSs. This
is due to the fact that such instruments are more sensitive to interest rate
changes and to the rate of principal prepayments than are most other MBSs. The
Series will hold less than 25 percent of its net assets in MBSs. For a
discussion of MBSs

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and the risks associated with such securities, see "Investment Methods and Risk
Factors."
The Series may also invest in asset-backed securities. These include
secured debt instruments backed by automobile loans, credit card loans, home
equity loans, manufactured housing loans and other types of secured loans
providing the source of both principal and interest payments. Asset-backed
securities are subject to risks similar to those discussed with respect to
MBSs. See "Investment Methods and Risk Factors."
The Series may invest in U.S. Government securities. U.S. Government
securities include bills, certificates of indebtedness, notes and bonds issued
by the Treasury or by agencies or instrumentalities of the U.S. Government. For
a discussion of the varying levels of guarantee associated with particular
types of U.S. Government securities, see "Investment Methods and Risk Factors"
- -- "U.S. Government Securities."
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
For the period August 5, 1996 (date of inception) to December 31, 1996,
the dollar weighted average of Series P's holdings (excluding equities) had the
following credit quality characteristics.

Investment Percent of Net Assets
---------- ---------------------
U.S. Government Securities ................ 0%
Cash and other Assets, Less Liabilities ... 21.6%
Rated Fixed Income Securities
AAA.................................... 0%
AA..................................... 0%
A ..................................... 0%
Baa/BBB................................ 0%
Ba/BB.................................. 29.4%
B...................................... 49.0%
Caa/CCC................................ 0%
Unrated Securities Comparable in Quality to
A...................................... 0%
Baa/BBB................................ 0%
Ba/BB.................................. 0%
B...................................... 0%
Caa/CCC................................ 0%
-------
Total.................................. 100.0%

The foregoing table is intended solely to provide disclosure about Series P's
asset composition for the period August 5, 1996 (date of inception) to December
31, 1996. The asset composition after this may or may not be approximately the
same as shown above.
The Series may acquire certain securities that are restricted as to
disposition under federal securities laws, including securities eligible for
resale to qualified institutional investors pursuant to Rule 144A under the
Securities Act of 1933, subject to the Series' policy that not more than 15
percent of the Series' net assets will be invested in illiquid assets. See
"Investment Methods and Risk Factors" for a discussion of restricted
securities.
The Series may purchase securities on "when-issued" or "delayed delivery"
basis in excess of customary settlement periods for the type of security
involved. The Series may also purchase or sell securities on a "forward
commitment" basis and may enter into "repurchase agreements," "reverse
repurchase agreements" and "roll transactions." The Series may lend securities
to broker/dealers, other institutions or other persons to earn additional
income. The value of loaned securities may not exceed 33 1/3 percent of the
Series' total assets. In addition, the Series may purchase loans, loan
participations and other types of direct indebtedness. See "Investment Methods
and Risk Factors" for a discussion of the risks associated with these
investment practices.
The Series may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or as an efficient means of
adjusting its exposure to the bond market. The Series will not use futures
contracts for leveraging purposes. The Series will limit its use of futures
contracts so that initial margin deposits or premiums on such contracts used
for non-hedging purposes will not equal more than 5 percent of the Series' net
asset value. The Series may purchase call and put options and write such
options on a "covered" basis. The Series may also enter into interest rate and
index swaps and purchase or sell related caps, floors and collars. The
aggregate market value of the Series' portfolio securities covering call or put
options will not exceed 25 percent of the Series' net assets. See the
discussion of "Options," "Futures Contracts and Related Options," "Futures and
Options Risk," and "Swaps, Caps, Floors and Collars" under "Investment Methods
and Risk Factors."
From time to time, the Series may invest part or all of its assets in U.S.
Government securities, commercial notes or money market instruments. It is
anticipated that the weighted average maturity of the Series' portfolio will
range from 5 to 15 years under normal circumstances.

SERIES S (SOCIAL AWARENESS SERIES)

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securities convertible into common stocks. Securities will be selected on the
basis of their appreciation and growth potential. Securities considered to have
capital appreciation and growth potential will often include securities of
smaller and less mature companies. Such companies may present greater
opportunities for capital appreciation because of high potential earnings
growth, but may also involve greater risk. They may have limited product lines,
markets or financial resources, and they may be dependent on a limited
management group. Their securities may trade less frequently and in limited
volume, and only in the over-the counter market or on smaller securities
exchanges. As a result, the securities of smaller companies may have limited
marketability and may be subject to more abrupt or erratic changes in value
than securities of larger, more established companies. The Series may also
invest in larger companies where opportunities for above-average capital
appreciation appear favorable and the Series' social criteria are satisfied.
Series S may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio or as an efficient
means of adjusting its exposure to the stock market. The Series will limit its
use of futures contracts so that initial margin deposits or premiums on such
contracts used for non-hedging purposes will not equal more than 5 percent of
the Series' net assets. The Series may also write call and put options on a
covered basis and purchase put and call options on securities and financial
indices. The aggregate market value of the Series' portfolio securities
covering call or put options will not exceed 25 percent of the Series' net
assets. See the discussion of options and futures contracts under "Investment
Methods and Risk Factors."
Series S will seek investments that comply with the Series' social
criteria and that offer investment potential. Because of the limitations on
investment imposed by the social criteria, the availability of investment
opportunities for the Series may be limited as compared to those of similar
funds which do not impose such restrictions on investment.
Series S will not invest in securities of companies that engage in the
production of nuclear energy, alcoholic beverages or tobacco products.
In addition, the Series will not invest in securities of companies that
significantly engage in: (1) the manufacture of weapon systems; (2) practices
that, on balance, have a detrimental effect on the environment; or (3) the
gambling industry. Series S will monitor the activities identified above to
determine whether they are significant to an issuer's business. Significance
may be determined on the basis of the percentage of revenue generated by, or
the size of operations attributable to, such activities. The Series may invest
in an issuer that engages in the activities set forth above, in a degree that
is not deemed significant by the Investment Manager. In addition, the Series
will seek out companies that have contributed substantially to the communities
in which they operate, have a positive record on employment relations, have
made substantial progress in the promotion of women and minorities or in the
implementation of benefit policies that support working parents, or have taken
notably positive steps in addressing environmental challenges.
The Investment Manager will evaluate an issuer's activities to determine
whether it engages in any practices prohibited by the Series' social criteria.
In addition to its own research with respect to an issuer's activities, the
Investment Manager will also rely on other organizations that publish
information for investors concerning the social policy implications of
corporate activities. The Investment Manager may rely upon information provided
by advisory firms that provide social research on U.S. corporations, such as
Kinder, Lydenberg, Domini & Co., Inc., Franklin Insight, Inc. and
Prudential-Bache Capital Funding. Investment selection on the basis of social
attributes is a relatively new practice and the sources for this type of
information are not well established. The Investment Manager will continue to
identify and monitor sources of such information to screen issuers which do not
meet the social investment restrictions of the Series.
If after purchase of an issuer's securities by Series S, it is determined
that such securities do not comply with the Series' social criteria, the
securities will be eliminated from the Series' portfolio within a reasonable
time. This requirement may cause the Series to dispose of a security at a time
when it may be disadvantageous to do so.

SERIES V (VALUE SERIES)

The investment objective of Series V is to seek long-term growth of
capital. Series V will seek to achieve its objective through investment in a
diversified portfolio of securities. Under normal circumstances the Series will
consist primarily of various types of common stock, which may include ADRs, and
securities convertible into common stocks which the Investment Manager believes
are undervalued relative to assets, earnings, growth potential or cash flows.
See the discussion of ADRs under "Investment Methods and Risk Factors." Under
normal circumstances, the Series will invest at least 65 percent of its assets
in the securities of companies which the Investment Manager believes are
undervalued.
Series V may also invest in (i) preferred stocks; (ii) warrants; and (iii)
investment grade debt securities (or unrated securities of comparable quality).
The Series may purchase securities on a "when-issued" or "delayed delivery
basis" in excess of customary settlement periods for the type of security
involved. The Series may purchase securities which are restricted as to
disposition under the federal securities laws, provided that such securities
are eligible for resale to qualified institutional investors pursuant to Rule
144A under the Securities Act of 1933 and subject to the Series' policy that
not more than 15 percent of its total assets will be invested in illiquid
securities. Series V reserves the right to invest its assets temporarily in
cash and money market instruments when, in the opinion of the Investment
Manager, it is advisable to do so on account of current or

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<PAGE>

anticipated market conditions. The Series may utilize repurchase agreements on
an overnight basis or bank demand accounts, pending investment in securities or
to meet potential redemptions or expenses. See the discussion of when-issued
securities, Rule 144A securities and repurchase agreements under "Investment
Methods and Risk Factors." The Series may borrow as set forth in the Statement
of Additional information. However, as an operating policy, the Series will not
purchase portfolio securities when borrowings exceed 5 percent of total Series
assets.

SERIES X (SMALL CAP SERIES)

The investment objective of Series X is to seek long-term growth of
capital. The Series invests primarily in equity securities of small market
capitalization companies ("small company stocks"). Market capitalization means
the total market value of a company's outstanding common stock. The Series
anticipates that under normal market conditions, the Series will invest at
least 65 percent of its assets in equity securities of domestic and foreign
companies with market capitalizations of less than $1 billion at the time of
purchase. The equity securities in which the Series may invest include common
stocks, preferred stocks (both convertible and non-convertible), warrants and
rights. It is anticipated that the Series will invest primarily in companies
whose securities are traded on foreign or domestic stock exchanges or in the
over-the-counter market ("OTC"). The Series also may invest in securities of
emerging growth companies, some of which may have market capitalizations over
$1 billion. Emerging growth companies are companies which have passed their
start-up phase and which show positive earnings and prospects of achieving
significant profit and gain in a relatively short period of time.
Under normal conditions, the Series intends to invest primarily in small
company stocks; however, the Series is also permitted to invest up to 35
percent of its assets in equity securities of domestic and foreign issuers with
a market capitalization of more than $1 billion at the time of purchase, debt
obligations and domestic and foreign money market instruments, including
bankers acceptances, certificates of deposit and discount notes of U.S.
Government securities. Debt obligations in which the Series may invest will be
investment grade debt obligations, although the Series may invest up to 5
percent of its assets in non-investment grade debt obligations which consist of
securities rated Ba or lower by Moody's or BB or lower by S&P. In addition, for
temporary or emergency purposes, the Series can invest up to 100 percent of
total assets in cash, cash equivalents, U.S. Government securities, commercial
paper and certain other money market instruments, as well as repurchase
agreements collateralized by these types of securities. The Series may also
invest in reverse repurchase agreements and shares of other non-affiliated
investment companies. See the discussion of such securities under "Investment
Methods and Risk Factors."
The Series may purchase an unlimited number of foreign securities,
including securities of companies in emerging markets. The Series may invest in
foreign securities, either directly or indirectly through the use of depositary
receipts. Depositary receipts, including American Depositary Receipts ("ADRs"),
European Depositary Receipts and American Depositary Shares are generally
issued by banks or trust companies and evidence ownership of underlying foreign
securities. The Series also may invest in securities of foreign investment
funds or trusts (including passive foreign investment companies). See the
discussion of foreign securities, emerging markets, currency risk and ADRs
under "Investment Methods and Risk Factors."
The Series may purchase and sell foreign currency on a spot basis and may
engage in forward currency contracts, currency options and futures transactions
for hedging or risk management purposes. See the discussion of currency risk
under "Investment Methods and Risk Factors."
At various times the Series may invest in derivative instruments for
hedging or risk management purposes or for any other permissible purpose
consistent with the Series' investment objective. Derivative transactions in
which the Series may engage include the writing of covered put and call options
on securities and the purchase of put and call options thereon, the purchase of
put and call options on securities indexes and exchange-traded options on
currencies and the writing of put and call options on securities indexes. The
Series may enter into spread transactions and swap agreements. The Series also
may buy and sell financial futures contracts which may include interest-rate
futures, futures on currency exchanges, and stock and bond index futures
contracts. The Series may enter into any futures contracts and related options
without limit for "bona fide hedging" purposes (as defined in the Commodity
Futures Trading Commission regulations) and for other permissible purposes,
provided that aggregate initial margin and premiums on positions engaged in for
purposes other than "bona fide hedging" will not exceed 5 percent of its net
asset value, after taking account unrealized profits and losses on such
contracts. See "Investment Methods and Risk Factors" -- "Options," "Futures
Contract and Related Options," "Regulatory Matters Related to Futures and
Options," and "Futures and Options Risk" below.
The Series may engage in short selling against the box, provided that no
more than 15 percent of the value of the Series' net assets is in deposits on
short sales against the box at any one time. The Series also may invest in real
estate investment trusts ("REITs") and other real estate industry companies or
companies with substantial real estate investments. See the discussion of real
estate securities under "Investment Methods and Risk Factors."
The Series may invest in restricted securities, including Rule 144A
securities, subject to the Series' policy that it will invest no more than 15
percent of its net assets in illiquid securities. See the discussion of
restricted securities under

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<PAGE>

"Investment Methods and Risk Factors". The Series also may invest in securities
purchased on a when-issued or delayed delivery basis and in hard asset
securities as discussed under "Investment Methods and Risk Factors."
While there is careful selection and constant supervision by the Series'
Sub-Adviser, Strong Capital Management, Inc. ("Strong"), there can be no
guarantee that the Series' objective will be achieved. Strong invests in
companies whose earnings are believed to be in a relatively strong growth
trend, and, to a lesser extent, in companies in which significant further
growth is not anticipated but which are perceived to be undervalued. In
identifying companies with favorable growth prospects, Strong considers factors
such as prospects for above-average sales and earnings growth; high return on
invested capital; overall financial strength; competitive advantages, including
innovative products and services; effective research, product development and
marketing; and stable, capable management.
Investing in securities of small-sized and emerging growth companies may
involve greater risks than investing in larger, more established issuers since
these securities may have limited marketability and, thus, they may be more
volatile than securities of larger, more established companies or the market
averages in general. Because small-sized companies normally have fewer shares
outstanding than larger companies, it may be more difficult for the Series to
buy or sell significant numbers of such shares without an unfavorable impact on
prevailing prices. Small-sized companies have limited production lines, markets
or financial resources and may lack management depth. In addition, small-sized
companies are typically subject to wider variations in earnings and business
prospects than are larger, more established companies. There is typically less
publicly available information concerning small-sized companies than for
larger, more established ones.
Securities of issuers in "special situations" also may be more volatile,
since the market value of these securities may decline in value if the
anticipated benefits do not materialize. Companies in "special situations"
include, but are not limited to, companies involved in acquisition or
consolidation; reorganization; recapitalization; merger, liquidation or
distribution of cash, securities or other assets; a tender or exchange offer, a
breakup or workout of a holding company; litigation which, if resolved
favorably, would improve the value of the companies' securities; or a change in
corporate control.
Although investing in securities of emerging growth companies and issuers
in "special situations" offers potential for above-average returns if the
companies are successful, the risk exists that the companies will not succeed
and the prices of the companies' shares could significantly decline in value.
Therefore, an investment in the Series may involve a greater degree of risk
than an investment in other mutual funds that seek long-term growth of capital
by investing in better-known, larger companies.

INVESTMENT METHODS AND RISK FACTORS

Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Series are described in the
"Investment Objectives and Policies" section of this Prospectus and in the
Fund's Statement of Additional Information. The following is a description of
certain additional risk factors related to various securities, instruments and
techniques. The risks so described only apply to those Series which may invest
in such securities and instruments or which use such techniques. Also included
is a general description of some of the investment instruments, techniques and
methods which may be used by one or more of the Series. The methods described
only apply to those Series which may use such methods. Although a Series may
employ the techniques, instruments and methods described below, consistent with
its investment objective and policies and any applicable law, no Series will be
required to do so.

INVESTMENT VEHICLES

CONVERTIBLE SECURITIES -- Each of the Series, except Series C, may invest
in convertible securities. A convertible security is a fixed income security or
a preferred stock that may be converted at either a stated price or stated rate
into underlying shares of common stock. Convertible securities have general
characteristics similar to both debt obligations and equity securities.
Although to a lesser extent than with debt obligations generally, the market
value of convertible securities tends to decline as interest rates increase
and, conversely, tends to increase as interest rates decline. In addition,
because of the conversion feature, the market value of convertible securities
tends to vary with fluctuations in the market value of the underlying common
stock, and therefore, also will react to variations in the general market for
equity securities. A unique feature of convertible securities is that as the
market price of the underlying common stock declines, convertible securities
tend to trade increasingly on a yield basis, and so may not experience market
value declines to the same extent as the underlying common stock. When the
market price of the underlying common stock increases, the prices of the
convertible securities tend to rise as a reflection of the value of the
underlying common stock. While no securities investments are without risk,
investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
As debt obligations, convertible securities are investments that provide
for a stable stream of income with generally higher yields than common stocks.
Of course, like all debt obligations, there can be no assurance of current
income because the issuers of the convertible securities may default on their
obligations. Convertible securities, however, generally offer lower interest or
dividend yields than non-convertible securities of similar quality because of
the

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potential for capital appreciation. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because the market value of securities will
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible
securities.
WARRANTS -- Warrants are options to buy a stated number of shares of
common stock at a specified price any time during the life of the warrants
(generally two or more years).
U.S. GOVERNMENT SECURITIES -- Each Series may invest in U.S. Government
securities which include obligations issued or guaranteed (as to principal and
interest) by the United States Government or its agencies (such as the Small
Business Administration, the Federal Housing Administration, and Government
National Mortgage Association), or instrumentalities (such as Federal Home Loan
Banks and Federal Land Banks), and instruments fully collateralized with such
obligations such as repurchase agreements. Some U.S. Government securities,
such as Treasury bills and bonds, 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 Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those of
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. Government National Mortgage Association (GNMA) certificates
are mortgage-backed securities representing part ownership of a pool of
mortgage loans on which timely payment of interest and principal is guaranteed
by the full faith and credit of the U.S. Government. Although U.S. Government
securities are guaranteed by the U.S. Government, its agencies or
instrumentalities, shares of the Series are not so guaranteed in any way.
MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities (MBSs), including
mortgage pass-through securities and collateralized mortgage obligations
(CMOs), include certain securities issued or guaranteed by the United States
government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA), or Federal Home Loan Mortgage Corporation (FHLMC); securities issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government or one
of its agencies or instrumentalities; and securities issued by private issuers
that represent an interest in or are collateralized by mortgage loans. A
mortgage pass-through security is a pro rata interest in a pool of mortgages
where the cash flow generated from the mortgage collateral is passed through to
the security holder. CMOs are obligations fully collateralized by a portfolio
of mortgages or mortgage-related securities.
Series E, N and P may invest in securities known as "inverse floating
obligations," "residual interest bonds," or "interest-only" (IO) and
"principal-only" (PO) bonds, the market values of which will generally be more
volatile than the market values of most MBSs. An inverse floating obligation is
a derivative adjustable rate security with interest rates that adjust or vary
inversely to changes in market interest rates. The term residual interest bond
is used generally to describe those instruments in collateral pools, such as
CMOs, which receive any excess cash flow generated by the pool once all other
bondholders and expenses have been paid. IOs and POs are created by separating
the interest and principal payments generated by a pool of mortgage-backed
bonds to create two classes of securities. Generally, one class receives
interest only payments (IO) and the other class principal only payments (PO).
MBSs have been referred to as "derivatives" because the performance of MBSs is
dependent upon and derived from underlying securities.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. Prepayment risk reflects the chance that borrowers may prepay
their mortgages faster than expected, thereby affecting the investment's
average life and perhaps its yield. Borrowers are most likely to exercise their
prepayment options at a time when it is least advantageous to investors,
generally prepaying mortgages as interest rates fall, and slowing payments as
interest rates rise. Certain classes of CMOs may have priority over others with
respect to the receipt of prepayments on the mortgages and the Series may
invest in CMOs which are subject to greater risk of prepayment. Market risk
reflects the chance that the price of the security may fluctuate over time. The
price of MBSs may be particularly sensitive to prevailing interest rates, the
length of time the security is expected to be outstanding and the liquidity of
the issue. In a period of unstable interest rates, there may be decreased
demand for certain types of MBSs, and a Series invested in such securities
wishing to sell them may find it difficult to find a buyer, which may in turn
decrease the price at which they may be sold. IOs and POs are acutely sensitive
to interest rate changes and to the rate of principal prepayments. They are
very volatile in price and may have lower liquidity than most mortgage-backed
securities. Certain CMOs may also exhibit these qualities, especially those
which pay variable rates of interest which adjust inversely with and more
rapidly than short-term interest rates. Credit risk reflects the chance that
the Series may not receive all or part of its principal because the issuer

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or credit enhancer has defaulted on its obligations. Obligations issued by U.S.
Government-related entities are guaranteed by the agency or instrumentality,
and some, such as GNMA certificates, 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 Treasury; others, such as those of the FNMA, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, are supported only by the credit of the
instrumentality. Although securities issued by U.S. Government-related agencies
are guaranteed by the U.S. Government, its agencies or instrumentalities,
shares of the Series are not so guaranteed in any way. The performance of
private label MBSs, issued by private institutions, is based on the financial
health of those institutions. There is no guarantee a Series' investment in
MBSs will be successful, and a Series' total return could be adversely affected
as a result.
ASSET-BACKED SECURITIES -- Asset-backed securities represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, for example, automobile, credit card or trade
receivables. Asset-backed commercial paper, one type of asset-backed security,
is issued by a special purpose entity, organized solely to issue the commercial
paper and to purchase interests in the assets. The credit quality of these
securities depends primarily upon the quality of the underlying assets and the
level of credit support and/or enhancement provided.
The underlying assets (e.g., loans) are subject to prepayments which
shorten the securities' weighted average life and may lower their return. If
the credit support or enhancement is exhausted, losses or delays in payment may
result if the required payments of principal and interest are not made. The
value of these securities also may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing the credit
support or enhancement.
HARD ASSET SECURITIES -- Hard asset securities are equity securities of
issuers which are directly or indirectly engaged to a significant extent in the
exploration development or distribution of one or more of the following:
precious metals; ferrous and non-ferrous metals; gas, petroleum, petrochemical
and/or other commodities (collectively, "Hard Assets"). The production and
marketing of Hard Assets may be affected by actions and changes in governments.
In addition, Hard Asset securities may be cyclical in nature. During periods of
economic or financial instability, the securities of some Hard Asset companies
may be subject to broad price fluctuations, reflecting the volatility of energy
and basic materials prices and the possible instability of supply of various
Hard Assets. In addition, some Hard Asset companies also may be subject to the
risks generally associated with extraction of natural resources, such as the
risks of mining and oil drilling, and the risks of the hazard associated with
natural resources, such as fire, drought, increased regulatory and
environmental costs, and others. Securities of Hard Asset companies may also
experience greater price fluctuations than the relevant Hard Asset. In periods
of rising Hard Asset prices, such securities may rise at a faster rate, and,
conversely, in times of falling Hard Asset prices, such securities may suffer a
greater price decline.
REAL ESTATE SECURITIES -- Certain Series may invest in equity securities
of real estate investment trusts ("REITs") and other real estate industry
companies or companies with substantial real estate investments and therefore,
such Series may be subject to certain risks associated with direct ownership of
real estate and with the real estate industry in general. These risks include,
among others: possible declines in the value of real estate; possible lack of
availability of mortgage funds; extended vacancies of properties; risks related
to general and local economic conditions; overbuilding; increases in
competition, property taxes and operating expenses; changes in zoning laws;
costs resulting from the clean-up of, and liability to third parties for
damages resulting from, environmental problems; casualty or condemnation
losses; uninsured damages from floods, earthquakes or other natural disasters;
limitations on and variations in rents; and changes in interest rates.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with several requirement of
the Internal Revenue Code, as amended ( the "Code"). Certain REITs may be
self-liquidating in that a specific term of existence is provided for in the
trust document. Such trusts run the risk of liquidating at an economically
inopportune time.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES -- Purchase or sale of
securities on a "forward commitment" basis may be used to hedge against
anticipated changes in interest rates and prices. The price, which is generally
expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date. When-issued
securities and forward commitments may be sold prior to the settlement date,
but the Series will enter into when-issued and forward commitments only with
the intention of actually receiving or delivering the securities, as the case
may be; however, a Series may dispose of a commitment prior to settlement if
the Investment Manager or relevant Sub-Adviser deems it appropriate to do so.
No income accrues on securities

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which have been purchased pursuant to a forward commitment or on a when-issued
basis prior to delivery of the securities. If a Series disposes of the right to
acquire a when-issued security prior to its acquisition or disposes of its
right to deliver or receive against a forward commitment, it may incur a gain
or loss. At the time a Series enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash or liquid
securities equal to the value of the when-issued or forward commitment
securities will be established and maintained with its custodian and will be
marked to market daily. There is a risk that the securities may not be
delivered and that the Series may incur a loss.
RESTRICTED SECURITIES -- Restricted securities are acquired through
private placement transactions, directly from the issuer or from security
holders, generally at higher yields or on terms more favorable to investors
than comparable publicly traded securities. However, the restrictions on resale
of such securities may make it difficult for a Series to dispose of such
securities at the time considered most advantageous, and/or may involve
expenses that would not be incurred in the sale of securities that were freely
marketable. Restricted securities cannot be sold to the public without
registration under the Securities Act of 1933 ("1933 Act"). Unless registered
for sale, restricted securities can be sold only in privately negotiated
transactions or pursuant to an exemption from registration. Restricted
securities are generally considered illiquid and, therefore, subject to the
Series' limitation on illiquid securities.
Trading restricted securities pursuant to Rule 144A may enable a Series to
dispose of restricted securities at a time considered to be advantageous and/or
at a more favorable price than would be available if such securities were not
traded pursuant to Rule 144A. However, the Rule 144A market is relatively new
and liquidity of a Series' investment in such market could be impaired if
trading does not develop or declines. Risks associated with restricted
securities include the potential obligation to pay all or part of the
registration expenses in order to sell certain restricted securities. A
considerable period of time may elapse between the time of the decision to sell
a security and the time a Series may be permitted to sell it under an effective
registration statement. If, during a period, adverse conditions were to
develop, a Series might obtain a less favorable price than prevailing when it
decided to sell.
Non-publicly traded securities (including Rule 144A Securities) may
involve a high degree of business and financial risk which may result in
substantial losses. The securities may be less liquid than publicly traded
securities. Although these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those
originally paid by the Series. In particular, Rules 144A Securities may be
resold only to qualified institutional buyers in accordance with Rules 144A
under the Securities Act of 1933. Unregistered securities may also be sold
abroad pursuant to Regulation S under the 1933 Act. Companies whose securities
are not publicly traded are not subject to the disclosure and other investor
protection requirements that would be applicable if their securities were
publicly traded. Acting pursuant to guidelines established by the Board of
Directors, some restricted securities and Rule 144A Securities may be
considered liquid.
The Board of Directors is responsible for developing and establishing
guidelines and procedures for determining the liquidity of Rule 144A
securities. As permitted by Rule 144A, the Board of Directors has delegated
this responsibility to the Investment Manager or relevant Sub-Adviser. In
making the determination regarding the liquidity of Rule 144A securities, the
Investment Manager or relevant Sub-Adviser will consider trading markets for
the specific security taking into account the unregistered nature of a Rule
144A security. In addition, the Investment Manager or relevant Sub-Adviser may
consider: (1) the frequency of trades and quotes; (2) the number of dealers
and potential purchasers; (3) dealer undertakings to make a market; and (4) the
nature of the security and of the market place trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). Investing in Rule 144A securities could have the effect of
increasing the amount of a Series' assets invested in illiquid securities to
the extent that qualified institutional buyers become uninterested, for a time,
in purchasing these securities.
AMERICAN DEPOSITARY RECEIPTS (ADRS) -- ADRs are dollar-denominated
receipts issued generally by U.S. banks and which represent the deposit with
the bank of a foreign company's securities. ADRs are publicly traded on
exchanges or over-the-counter in the United States. Investors should consider
carefully the substantial risks involved in investing in securities issued by
companies of foreign nations, which are in addition to the usual risks inherent
in domestic investments. See "Foreign Investment Risks," page 31.
BRADY BONDS -- Certain Series may invest in "Brady Bonds," which are debt
restructurings that provide for the exchange of cash and loans for newly issued
bonds. Brady Bonds are securities created through the exchange of existing
commercial bank loans to public and private entities in certain emerging
markets for new bonds in connection with debt restructuring under a debt
restructuring plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady. Brady Bonds recently have been issued by the governments of
Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic, Jordan, Mexico,
Nigeria, The Philippines, Uruguay and Venezuela, and are expected to be issued
by Ecuador and Poland and other emerging market countries. Approximately $150
billion in principal amount of Brady Bonds has been issued to date, the largest
proportion having been issued by Mexico and Venezuela. Investors should
recognize that Brady Bonds have been issued only recently and, accordingly, do
not

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have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U.S. dollar)
and are actively traded in the secondary market for Latin American debt. The
Salomon Brothers Brady Bond Index provides a benchmark that can be used to
compare returns of emerging market Brady Bonds with returns in other bond
markets, e.g., the U.S. bond market.
Series K may invest in either collateralized or uncollateralized Brady
Bonds denominated in various currencies, while Series B and Series P may invest
only in collateralized bonds denominated in U.S. dollars. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at the time and is adjusted at regular
intervals thereafter.
LOAN PARTICIPATIONS AND ASSIGNMENTS -- Certain Series may invest in fixed
and floating rate loans ("Loans") arranged through private negotiations between
a corporate or foreign entity and one or more financial institutions
("Lenders"). Certain Series may also invest in participations in Loans
("Participations") and assignments of portions of Loans from third parties
("Assignments"). Participations typically will result in a Series having a
contractual relationship only with the Lender, not with the borrower. The
Series will have the right to receive payments of principal, interest and any
fees to which it is entitled only from the Lender selling the Participation and
only upon receipt by the Lender of the payments from the borrower. In
connection with purchasing Participations, the Series generally will have no
right to enforce compliance by the borrower with the terms of the loan
agreement relating to the Loan ("Loan Agreement"), nor any rights of set-off
against the borrower, and the Series may not directly benefit from any
collateral supporting the Loan in which it has purchased the Participation. As
a result, the Series will assume the credit risk of both the borrower and the
Lender that is selling the Participation.
In the event of the insolvency of the Lender selling a Participation, the
Series may be treated as a general creditor of the Lender and may not benefit
from any set-off between the Lender and the borrower. The Series will acquire
Participations only if the Lender interpositioned between the Series and the
borrower is determined by the Investment Manager or relevant Sub-Adviser to be
creditworthy. When a Series purchases Assignments from Lenders, the Series will
acquire direct rights against the borrower on the Loan. However, since
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the Series as
the purchaser of an Assignment may differ from, and be more limited than, those
held by the assigning Lender.
A Series may have difficulty disposing of Assignments and Participations.
The liquidity of such securities is limited and the Series anticipate that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Series' ability to dispose of particular
Assignments or Participations when necessary to meet the Series' liquidity
needs or in response to a specific economic event, such as a deterioration in
the creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for a Series to
assign a value to those securities for purposes of valuing the Series'
portfolio and calculating its net asset value.
ZERO COUPON SECURITIES -- Certain Series may invest in certain zero coupon
securities that are "stripped" U.S. Treasury notes and bonds. Certain Series
also may invest in zero coupon and other deep discount securities issued by
foreign governments and domestic and foreign corporations, including certain
Brady Bonds and other foreign debt and payment-in-kind securities. Zero coupon
securities pay no interest to holders prior to maturity, and payment-in-kind
securities pay interest in the form of additional securities. However, a
portion of the original issue discount on zero coupon securities and the
"interest" on payment-in-kind securities will be included in the investing
Series' income. Accordingly, for a Series to qualify for tax treatment as a
regulated investment company and to avoid certain taxes (see "Distributions and
Federal Income Tax Considerations"), the Series may be required to distribute
an amount that is greater than the total amount of cash it actually receives.
These distributions must be made from the Series' cash assets or, if necessary,
from the proceeds of sales of portfolio securities. A Series will not be able
to purchase additional income-producing securities with cash used to make such
distributions and its current income ultimately may be reduced as a result.
Zero coupon and payment-in-kind securities usually trade at a deep discount
from their face or par value and will be subject to greater fluctuations of
market value in response to changing interest rates than debt obligations of
comparable maturities that make current distributions of interest in cash.
SOVEREIGN DEBT -- Certain Series may invest in sovereign debt securities
of emerging market governments, including Brady Bonds (described above).
Investments in such securities involve special risks. The issuer of the debt or
the governmental authorities that control the repayment of the debt may be
unable or unwilling to repay principal or interest when due in accordance with
the terms of such debt. Periods of economic uncertainty may result in the
volatility of market prices of sovereign debt, and in turn the Series' net
asset value, to a greater extent than the volatility inherent in domestic fixed
income securities. A sovereign

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debtor's willingness or ability to repay principal and pay interest in a timely
manner may be affected by, among other factors, its cash flow situation, the
extent of its foreign reserves, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of the debt service burden to
the economy as a whole, the sovereign debtor's policy toward principal
international lenders and the political constraints to which a sovereign debtor
may be subject. Emerging market governments could default on their sovereign
debt. Such sovereign debtors also may be dependent on expected disbursements
from foreign governments, multilateral agencies and other entities abroad to
reduce principal and interest arrearages on their debt. The commitment on the
part of these governments, agencies and others to make such disbursements may
be conditioned on a sovereign debtor's implementation of economic reforms
and/or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due, may result in the
cancellation of such third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debt.
The occurrence of political, social or diplomatic changes in one or more
of the countries issuing sovereign debt could adversely affect the Series'
investments. Emerging markets are faced with social and political issues and
some of them have experienced high rates of inflation in recent years and have
extensive internal debt. Among other effects, high inflation and internal debt
service requirements may adversely affect the cost and availability of future
domestic sovereign borrowing to finance governmental programs, and may have
other adverse social, political and economic consequences. Political changes or
a deterioration of a country's domestic economy or balance of trade may affect
the willingness of countries to service their sovereign debt. Although the
Investment Manager or relevant Sub-Adviser intends to manage the Series in a
manner that will minimize the exposure to such risks, there can be no assurance
that adverse political changes will not cause the Series to suffer a loss of
interest or principal on any of its holdings.
In recent years, some of the emerging market countries in which Series K
expects to invest have encountered difficulties in servicing their sovereign
debt obligations. Some of these countries have withheld payments of interest
and/or principal of sovereign debt. These difficulties have also led to
agreements to restructure external debt obligations--in particular, commercial
bank loans, typically by rescheduling principal payments, reducing interest
rates and extending new credits to finance interest payments on existing debt.
In the future, holders of emerging market sovereign debt securities may be
requested to participate in similar rescheduling of such debt. Certain emerging
market countries are among the largest debtors to commercial banks and foreign
governments. At times certain emerging market countries have declared a
moratorium on the payment of principal and interest on external debt; such a
moratorium is currently in effect in certain emerging market countries. There
is no bankruptcy proceeding by which a creditor may collect in whole or in part
sovereign debt on which an emerging market government has defaulted.
The ability of emerging market governments to make timely payments on
their sovereign debt securities is likely to be influenced strongly by a
country's balance of trade and its access to trade and other international
credits. A country whose exports are concentrated in a few commodities could be
vulnerable to a decline in the international prices of one or more of such
commodities. Increased protectionism on the part of a country's trading
partners could also adversely affect its exports. Such events could diminish a
country's trade account surplus, if any. To the extent that a country receives
payment for its exports in currencies other than hard currencies, its ability
to make hard currency payment could be affected.
Investors should also be aware that certain sovereign debt instruments in
which the Series may invest involve great risk. As noted above, sovereign debt
obligations issued by emerging market governments generally are deemed to be
the equivalent in terms of quality to securities rated below investment grade
by Moody's and S&P. Such securities are regarded as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations and involve major risk exposure to
adverse conditions. Some of such securities, with respect to which the issuer
currently may not be paying interest or may be in payment default, may be
comparable to securities rated D by S&P or C by Moody's. The Series may have
difficulty disposing of and valuing certain sovereign debt obligations because
there may be a limited trading market for such securities. Because there is no
liquid secondary market for many of these securities, the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. Certain sovereign debt securities may be illiquid.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS
- -- A repurchase agreement is a contract under which a Series would acquire a
security for a relatively short period (usually not more than 7 days) subject
to the obligation of the seller to repurchase and the Series to resell such
security at a fixed time and price. The resale price is in excess of the
purchase price and reflects an agreed-upon market rate unrelated to the coupon
rate of the purchased security. Repurchase agreements will be fully
collateralized including interest earned thereon during the entire term of the
agreement. If the institution defaults on the repurchase agreement, the Series
will retain possession of the underlying securities. If bankruptcy proceedings
are commenced with respect to the seller, realization on the collateral by the
Series may be delayed or limited and the Series may incur additional costs. In
such case, the Series will be subject to risks associated with changes in
market value of the collateral securities. Each of

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the Series intends to limit repurchase agreements to institutions believed by
the Investment Manager or relevant Sub-Adviser to present minimal credit risk.
Certain Series may also enter into reverse repurchase agreements with the
same parties with whom they may enter into repurchase agreements. Under a
reverse repurchase agreement, the Series would sell securities and agree to
repurchase them at a particular price at a future date. Reverse repurchase
agreements involve the risk that the market value of the securities retained in
lieu of sale by the Series may decline below the price of the securities the
Series has sold but is obligated to repurchase. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, such buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce the Series' obligation to repurchase the
securities, and the Series' use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such decision.
Certain Series also may enter into "dollar rolls," in which the Series
sells fixed income securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period,
the Series would forego principal and interest paid on such securities. The
Series would be compensated by the difference between the current sales price
and the forward price for the future purchase, as well as by the interest
earned on the cash proceeds of the initial sale.
At the time a Series enters into reverse repurchase agreements or dollar
rolls, it will establish and maintain a segregated account with its custodian
containing cash or liquid securities having a value not less than the
repurchase price, including accrued interest. Reverse repurchase agreements and
dollar rolls will be treated as borrowings and will be deducted from a Series'
assets for purposes of calculating compliance with the Series' borrowing
limitation. See "Borrowing," below.

MANAGEMENT PRACTICES

CASH RESERVES -- Each Series may establish and maintain reserves as the
Investment Manager or relevant Sub-Adviser believes is advisable to facilitate
the Series' cash flow needs (e.g., redemptions, expenses and, purchases of
portfolio securities) or for temporary, defensive purposes. Such reserves may
be invested in domestic, and for certain Series, foreign money market
instruments rated within the top two credit categories by a national rating
organization, or if unrated, the Investment Manager or Sub-Adviser equivalent.
SHARES OF OTHER INVESTMENT COMPANIES -- Series K, M, N, O and X may invest
in shares of other investment companies. A Series' investment in shares of
other investment companies may not exceed immediately after purchase 10 percent
of the Series' total assets and no more than 5 percent of its total assets may
be invested in the shares of any one investment company. Investment in the
shares of other investment companies has the effect of requiring shareholders
to pay the operating expenses of two mutual funds.
BORROWING -- Each Series may borrow money from banks as a temporary
measure for emergency purposes, to facilitate redemption requests, or for other
purposes consistent with the Series' investment objective and program. Such
borrowings may be collateralized with Series assets. Borrowings will not exceed
5 percent of the total assets of each Series except Series K, M, N, O, P, V and
X, borrowings of which may not exceed 33 1/3 percent of total assets. To the
extent that a Series purchases securities while it has outstanding borrowings,
it is using leverage, i.e., using borrowed funds for investment. Leveraging
will exaggerate the effect on net asset value of any increase or decrease in
the market value of a Series' portfolio. Money borrowed for leveraging will be
subject to interest costs that may or may not be recovered by appreciation of
the securities purchased; in certain cases, interest costs may exceed the
return received on the securities purchased. A Series also may be required to
maintain minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest
rate. Series O may not purchase securities when borrowings exceed 5 percent of
its total assets.
LENDING OF PORTFOLIO SECURITIES -- Certain Series may lend securities to
broker-dealers, institutional investors, or other persons to earn additional
income. The principal risk is the potential insolvency of the broker-dealer or
other borrower. In this event, the Series could experience delays in recovering
its securities and possibly capital losses. Any loan will be continuously
secured by collateral at least equal to the value of the security loaned. Such
lending could result in delays in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially.
FORWARD CURRENCY TRANSACTIONS -- In seeking to protect against currency
exchange rate or interest rate changes that are adverse to their present or
prospective positions, certain Series may employ certain risk management
practices involving the use of forward currency contracts and options
contracts, futures contracts and options on futures contracts on U.S. and
foreign government securities and currencies. Series K also may enter into
interest rate, currency and index swaps and purchase or sell related caps,
floors and collars and other derivatives. See "Swaps, Caps, Floors and
Collars," page 28. There can be no assurance that such risk management
practices will succeed. Only a limited market, if any, currently exists for
forward currency contracts and options and futures instruments relating to
currencies of most emerging markets, to securities denominated in such
currencies or to securities of issuers domiciled or principally engaged in
business in such emerging markets. To the extent

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that such a market does not exist, a Sub-Adviser may not be able to effectively
hedge its investment in such emerging markets.
To attempt to hedge against adverse movements in exchange rates between
currencies, certain Series may enter into forward currency contracts for the
purchase or sale of a specified currency at a specified future date. Such
contracts may involve the purchase or sale of a foreign currency against the
U.S. dollar or may involve two foreign currencies. Such Series may enter into
forward currency contracts either with respect to specific transactions or with
respect to the respective Series' portfolio positions. For example, when a
Series anticipates making a purchase or sale of a security, it may enter into a
forward currency contract in order to set the rate (either relative to the U.S.
dollar or another currency) at which a currency exchange transaction related to
the purchase or sale will be made. Further, if the Investment Manager or
relevant Sub-Adviser believes that a particular currency may decline compared
to the U.S. dollar or another currency, certain Series may enter into a forward
contract to sell the currency the Investment Manager or Sub-Adviser expects to
decline in an amount up to the value of the portfolio securities held by the
Series denominated in a foreign currency.
The Series' use of forward currency contracts or options and futures
transactions involve certain investment risks and transaction costs to which
they might not otherwise be subject. These risks include: dependence on the
Investment Manager or relevant Sub-Adviser's ability to predict movements in
exchange rates; imperfect correlation between movements in exchange rates and
movements in the currency hedged; and the fact that the skills needed to
effectively hedge against the Series' currency risks are different from those
needed to select the securities in which a Series invests. The Series also may
conduct foreign currency exchange transactions on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market.
OPTIONS -- A call option on a security gives the purchaser of the option,
in return for a premium paid to the writer (seller), the right to buy the
underlying security at the exercise price at any time during the option period.
Upon exercise by the purchaser, the writer (seller) of a call option has the
obligation to sell the underlying security at the exercise price. When a Series
purchases a call option, it will pay a premium to the party writing the option
and a commission to the broker selling the option. If the option is exercised
by such Series, the amount of the premium and the commission paid may be
greater than the amount of the brokerage commission that would be charged if
the security were to be purchased directly. By writing a call option, a Series
assumes the risk that it may be required to deliver the security having a
market value higher than its market value at the time the option was written. A
Series will write call options in order to obtain a return on its investments
from the premiums received and will retain the premiums whether or not the
options are exercised. Any decline in the market value of the Series' portfolio
securities will be offset to the extent of the premiums received (net of
transaction costs). If an option is exercised, the premium received on the
option will effectively increase the exercise price.
The Series may write only covered call options. This means that the Series
will own the security or currency subject to the option or an option to
purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an
account consisting of cash or liquid securities having a value equal to the
fluctuating market value of the optioned securities or currencies. During the
option period the writer of a call option has given up the opportunity for
capital appreciation above the exercise price should market price of the
underlying security increase, but has retained the risk of loss should the
price of the underlying security decline. Writing call options also involves
the risk relating to the Series' ability to close out options it has written.
A call option on a stock index is similar to a call option on an
individual security, except that the value of the option depends on the
weighted value of the group of securities comprising the index and all
settlements are made in cash. A call option may be terminated by the writer
(seller) by entering into a closing purchase transaction in which it purchases
an option of the same series as the option previously written.
A put option on a security gives the purchaser of the option, in return
for premium paid to the writer (seller), the right to sell the underlying
security at the exercise price at any time during the option period. Upon
exercise by the purchaser, the writer of a put option has the obligation to
purchase the underlying security at the exercise price. The Series may write
only covered put options, which means that the Series will maintain in a
segregated account cash or liquid securities in an amount not less than the
exercise price or the Series will own an option to sell the underlying security
or currency subject to the option having an exercise price equal to or greater
than the exercise price of the "covered" option at all times which the put
option is outstanding. By writing a put option, the Series assumes the risk
that it may be required to purchase the underlying security at a price in
excess of its current market value.
A put option on a stock index is similar to a put option on an individual
security, except that the value of the option depends on the weighted value of
the group of securities comprising the index and all settlements are made in
cash.
A Series may sell a call option or a put option which it has previously
purchased prior to purchase (in the case of a call) or the sale (in the case of
a put) of the underlying security. Any such sale would result in a net gain or
loss depending on whether the amount received on the sale is more or less than
the premium and other transaction costs paid on the call or put which is sold.

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FUTURES CONTRACTS AND RELATED OPTIONS -- Certain Series may buy and sell
futures contracts (and options on such contracts) to manage exposure to changes
in securities prices and foreign currencies and as an efficient means of
adjusting overall exposure to certain markets. A financial futures contract
calls for delivery of a particular security at a certain time in the future.
The seller of the contract agrees to make delivery of the type of security
called for in the contract and the buyer agrees to take delivery at a specified
future time. A Series may also write call options and purchase put options on
financial futures contracts as a hedge to attempt to protect the Series'
securities from a decrease in value. When a Series writes a call option on a
futures contract, it is undertaking the obligation of selling a futures
contract at a fixed price at any time during a specified period if the option
is exercised. Conversely, the purchaser of a put option on a futures contract
is entitled (but not obligated) to sell a futures contract at a fixed price
during the life of the option.
Financial futures contracts include interest rate futures contracts and
stock index futures contracts. An interest rate futures contract obligates the
seller of the contract to deliver, and the purchaser to take delivery of,
interest rate securities called for in a contract at a specified future time at
a specified price. A stock index assigns relative values to common stocks
included in the index and the index fluctuates with changes in the market
values of the common stocks included. A stock index futures contract is a
bilateral contract 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 the last trading day of the
contract and the price at which the futures contract is originally struck. An
option on a financial futures contract gives the purchaser the right to assume
a position in the contract (a long position if the option is a call and a short
position if the option is a put) at a specified exercise price at any time
during the period of the option.
REGULATORY MATTERS RELATED TO FUTURES AND OPTIONS -- In connection with
its proposed futures and options transactions, the Fund filed for the Series
with the CFTC a notice of eligibility for exemption from the definition of (and
therefore from CFTC regulation as) a "commodity pool operator" under the
Commodity Exchange Act. The Fund represents in its notice of eligibility that:
(i) it will not purchase or sell futures or options on futures contracts or
stock indices if as a result the sum of the initial margin deposits on its
existing futures contracts and related options positions and premiums paid for
options on futures contracts or stock indices would exceed 5 percent of each
Series' assets; and (ii) with respect to each futures contract purchased or
long position in an option contract, each Series will set aside in a segregated
account cash or liquid securities in an amount equal to the market value of
such contract less the initial margin deposit.
The Staff of Securities and Exchange Commission ("SEC") has taken the
position that the purchase and sale of futures contracts and the writing of
related options may involve senior securities for the purposes of the
restrictions contained in Section 18 of the Investment Company Act of 1940 on
investment companies' issuing senior securities. However, the Staff has issued
letters declaring that it will not recommend enforcement action under Section
18 if an investment company: (i) sells futures contracts to offset expected
declines in the value of the investment company's securities, provided the
value of such futures contracts does not exceed the total market value of those
securities (plus such additional amount as may be necessary because of
differences in the volatility factor of the securities vis-a-vis the futures
contracts); (ii) writes call options on futures contracts, stock indexes or
other securities, provided that such options are covered by the investment
company's holding of a corresponding long futures position, by its ownership of
securities which correlate with the underlying stock index, or otherwise; (iii)
purchases futures contracts, provided the investment company establishes a
segregated account consisting of cash or liquid securities in an amount equal
to the total market value of such futures contracts less the initial margin
deposited therefor; and (iv) writes put options on futures contracts, stock
indexes or other securities, provided that such options are covered by the
investment company's holding of a corresponding short futures position, by
establishing a cash segregated account in an amount equal to the value of its
obligation under the option, or otherwise.
Each Series will conduct its purchases and sales of any futures contracts
and writing of related options transactions in accordance with the foregoing.
SWAPS, CAPS, FLOORS AND COLLARS -- Certain Series may enter into interest
rate and index swaps, the purchase or sale of related caps, floors and collars
and other derivative instruments. Series K may also enter into currency swaps.
The Series expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a technique for managing the
portfolio's duration (i.e., the price sensitivity to changes in interest rates)
or to protect against any increase in the price of securities the Series
anticipates purchasing at a later date. The Series intends to use these
transactions as hedges and not as speculative investments, and will not sell
interest rate caps or floors if it does not own securities or other instruments
providing the income the Series may be obligated to pay at a later date.
Interest rate swaps involve the exchange by the Series with another party
of their respective commitments to pay or receive interest (for example, an
exchange of floating rate payments for fixed rate payments) with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount based on changes in the values of the reference
indices.

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The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate. The purchase of an
interest rate floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
HYBRID INSTRUMENTS -- These instruments (which are derivatives) can
combine the characteristics of securities, futures and options. For example,
the principal amount, redemption or conservation terms of a security could be
related to the market price of some commodity, currency or securities index.
The risks of such investments would reflect the risks of investing in futures,
options and securities, including volatility and illiquidity. Such securities
may bear interest or pay dividends at below market (or even relatively nominal)
rates. Under certain conditions, the redemption value of such an investment
could be zero. Hybrids can have volatile prices and limited liquidity and their
use by the Series may not be successful.

RISK FACTORS

GENERAL -- Each Series' net asset value will fluctuate, reflecting
fluctuations in the market value of its portfolio positions and, if applicable,
its net currency exposure. The value of fixed income securities generally
fluctuates inversely with interest rate movements. Longer term bonds held by a
Series are subject to greater interest rate risk. There is no assurance that
any Series will achieve its investment objective.
FUTURES AND OPTIONS RISK -- Futures contracts and options can be highly
volatile and could result in reduction of a Series' total return, and a Series'
attempt to use such investments for hedging purposes may not be successful.
Successful futures strategies require the ability to predict future movements
in securities prices, interest rates and other economic factors. Losses from
options and futures could be significant if a Series is unable to close out its
position due to distortions in the market or lack of liquidity. A Series' risk
of loss from the use of futures extends beyond its initial investment and could
potentially be unlimited.
The use of futures, options and forward contracts involves investment
risks and transaction costs to which a Series would not be subject absent the
use of these strategies. If the Investment Manager or relevant Sub-Adviser
seeks to protect a Series against potential adverse movements in the
securities, foreign currency or interest rate markets using these instruments,
and such markets do not move in a direction adverse to such Series, such Series
could be left in a less favorable position than if such strategies had not been
used. Risks inherent in the use of futures, options and forward contracts
include: (a) the risk that interest rates, securities prices and currency
markets will not move in the directions anticipated; (b) imperfect correlation
between the price of futures, options and forward contracts and movements in
the prices of the securities or currencies being hedged; (c) the fact that
skills needed to use these strategies are different from those needed to select
portfolio securities; (d) the possible absence of a liquid secondary market for
any particular instrument at any time; and (e) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences. A
Series' ability to terminate option positions established in the
over-the-counter market may be more limited than in the case of exchange-traded
options and may also involve the risk that securities dealers participating in
such transactions would fail to meet their obligations to such Series.
The use of options and futures involves the risk of imperfect correlation
between movements in options and futures prices and movements in the price of
securities which are the subject of a hedge. Such correlation, particularly
with respect to options on stock indices and stock index futures, is imperfect,
and such risk increases as the composition of the Series diverges from the
composition of the relevant index. The successful use of these strategies also
depends on the ability of the Investment Manager or relevant Sub-Adviser to
correctly forecast interest rate movements and general stock market price
movements.
FOREIGN INVESTMENT RISKS -- Investment in foreign securities involves
risks and considerations not present in domestic investments. 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. The securities of non-U.S. issuers generally are not
registered with the SEC, nor are the issuers thereof usually subject to the
SEC's reporting requirements. Accordingly, there may be less publicly available
information about foreign securities and issuers than is available with respect
to U.S. securities and issuers.
Foreign securities markets, while growing in volume, have for the most
part substantially less volume than United States securities markets and
securities for foreign companies are generally less liquid and at times their
prices may be more volatile than prices of comparable United States companies.
Foreign stock exchanges, brokers and listed companies generally are subject to
less government supervision and regulation than in the United States. The
customary settlement time for foreign securities may be longer than the
customary settlement time for United States securities.
A Series' income and gains from foreign issuers may be subject to non-U.S.
withholding or other taxes, thereby reducing its income and gains. In addition,
with respect to some foreign countries, there is the increased possibility of
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets of the Series, political or social instability, or diplomatic
developments which could affect the investments of the Series in those
countries.

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Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, rate of savings and capital reinvestment, resource self-sufficiency
and balance of payments positions.
CURRENCY RISK -- Series that invest in securities denominated in
currencies other than the U.S. dollar, will be affected favorably or
unfavorably by exchange control regulations or changes in the exchange rates
between such currencies and the U.S. dollar. Changes in currency exchange rates
will influence the value of a Series' shares, and also may affect the value of
dividends and interest earned by the Series and gains and losses realized by
the Series. In addition, the Series may incur costs in connection with the
conversion or transfer of foreign currencies. Currencies generally are
evaluated on the basis of fundamental economic criteria (e.g., relative
inflation and interest rate levels and trends, growth rate forecasts, balance
of payments status and economic policies) as well as technical and political
data. The exchange rates between the U.S. dollar and other currencies are
determined by supply and demand in the currency exchange markets, the
international balance of payments, governmental intervention, speculation and
other economic and political conditions. If the currency in which a security is
denominated appreciates against the U.S. dollar, the dollar value of the
security will increase. Conversely, a decline in the exchange rate of the
currency would adversely affect the value of the security expressed in U.S.
dollars.
EMERGING MARKETS RISKS -- Because of the special risks associated with
investing in emerging markets, an investment in a Series investing in such
markets should be considered speculative. Investors are strongly advised to
consider carefully the special risks involved in emerging markets, which are in
addition to the usual risks of investing in developed foreign markets around
the world. Investing in emerging markets involves risks relating to potential
political and economic instability within such markets and the risks of
expropriation, nationalization, confiscation of assets and property or the
imposition of restrictions on foreign investment and on repatriation of capital
invested. In the event of such expropriation, nationalization or other
confiscation in any emerging market, the Series could lose its entire
investment in that market. Many emerging market countries have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain emerging market countries. Economies in emerging markets generally are
dependent heavily upon international trade and, accordingly, have been and may
continue to be affected adversely by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures
imposed or negotiated by the countries with which they trade. These economies
also have been and may continue to be affected adversely by economic conditions
in the countries with which they trade.
The securities markets of emerging countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of
the United States and other more developed countries. Disclosure and regulatory
standards in many respects are less stringent than in the United States and
other major markets. There also may be a lower level of monitoring and
regulation of emerging securities markets and the activities of investors in
such markets, and enforcement of existing regulations has been extremely
limited. Emerging markets may include former communist countries. There is a
possibility that these countries may revert back to communism. In addition,
brokerage commissions, custodial services and other costs relating to
investment in foreign markets generally are more expensive than in the United
States, particularly with respect to emerging markets. Such markets have
different settlement and clearance procedures. In certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions. The
inability of the Series to make intended securities purchases due to settlement
problems could cause the Series to forego attractive investment opportunities.
Inability to dispose of a portfolio security caused by settlement problems
could result either in losses to the Series due to subsequent declines in value
of the portfolio security or, if the Series has entered into a contract to sell
the security, could result in possible liability to the purchaser.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for the Series' portfolio securities in such
markets may not be readily available. Section 22(e) of the 1940 Act permits a
registered investment company to suspend redemption of its shares for any
period during which an emergency exists, as determined by the SEC. Accordingly,
when the Fund believes that appropriate circumstances warrant, it will promptly
apply to the SEC for a determination that an emergency exists within the
meaning of Section 22(e) of the 1940 Act. During the period commencing from the
Fund's identification of such conditions until the date of SEC action, the
portfolio securities of the Series in the affected markets will be valued at
fair value as determined in good faith by or under the direction of the Fund's
Board of Directors.
RISKS ASSOCIATED WITH INVESTMENTS IN HIGH-YIELD LOWER-RATED DEBT
SECURITIES -- Investment in debt securities rated below investment grade
involves a high degree of risk. Debt securities rated BB, B, CCC, CC and C by
S&P and Ba, B Caa, Ca and C by Moody's, are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. For S&P, BB
indicates the lowest degree of speculation and C the highest degree of

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speculation. For Moody's, Ba indicates the lowest degree of speculation and C
the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Similarly, debt
rated Ba or BB and below is regarded by the relevant rating agency as
speculative. Debt rated C by Moody's or S&P is the lowest quality debt that is
not in default as to principal or interest and such issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. Such securities are also generally considered to be
subject to greater risk than higher quality securities with regard to a
deterioration of general economic conditions. These securities are the
equivalent of high yield, high risk bonds. As noted above, certain Series may
invest in debt securities rated below C, which are in default as to principal
and/or interest. Ratings of debt securities represent the rating agency's
opinion regarding their quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating
agencies may fail to make timely changes in credit quality in response to
subsequent events, so that an issuer's current financial condition may be
better or worse than a rating indicates.

DESCRIPTION OF CORPORATE BOND RATINGS

MOODY'S
INVESTORS STANDARD & POOR'S
SERVICE, INC. CORPORATION DEFINITION

Aaa AAA Highest quality
Aa AA High quality
A A Upper medium grade
Baa BBB Medium grade
Ba BB Lower medium grade/
speculative elements
B B Speculative
Caa CCC More speculative/
Ca CC possibly in or
C C high risk of default
--- D In default
Not rated Not rated Not rated

For a more complete description of the corporate bond ratings, see the
Appendix to the Fund's Statement of Additional Information.
The market value of lower quality debt securities tends to reflect
individual developments of the issuer to a greater extent than do higher
quality securities, which react primarily to fluctuations in the general level
of interest rates. In addition, lower quality debt securities tend to be more
sensitive to economic conditions and generally have more volatile prices than
higher quality securities. Issuers of lower quality securities are often highly
leveraged and may not have available to them more traditional methods of
financing. For example, during an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower quality securities may
experience financial stress. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations may also be adversely affected by
specific developments affecting the issuer, such as the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing. Similarly, certain emerging market governments that issue lower
quality debt securities are among the largest debtors to commercial banks,
foreign governments and supranational organizations such as the World Bank and
may not be able or willing to make principal and/or interest repayments as they
come due. The risk of loss due to default by the issuer is significantly
greater for the holders of lower quality securities because such securities are
generally unsecured and are often subordinated to other creditors of the
issuer. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower
quality securities, especially in a thinly traded market.
Lower quality debt securities of corporate issuers frequently have call or
buy-back features which would permit an issuer to call or repurchase the
security from the Series. If an issuer exercises these provisions in a
declining interest rate market, the Series may have to replace the security
with a lower yielding security, resulting in a decreased return for investors.
In addition, the Series may have difficulty disposing of lower quality
securities because there may be a thin trading market for such securities.
There may be no established retail secondary market for many of these
securities, and the Series anticipates that such securities could be sold only
to a limited number of dealers or institutional investors. The lack of a liquid
secondary market also may have an adverse impact on market prices of such
instruments and may make it more difficult for the Series to obtain accurate
market quotations for purposes of valuing the securities in the portfolio of
the Series.
Factors having an adverse effect on the market value of lower rated
securities or their equivalents purchased by the Series will adversely impact
net asset value of the Series. See "Investment Methods and Risk Factors" in the
Statement of Additional Information. In addition to the foregoing, such factors
may include: (i) potential adverse publicity; (ii) heightened sensitivity to
general economic or political conditions; and (iii) the likely adverse impact
of a major economic recession. A Series also may incur additional expenses to
the extent it is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings, and the Series may have
limited legal recourse in the event of a default. Debt securities issued by
governments in emerging markets can differ from debt obligations issued by
private entities in that remedies from defaults generally must be pursued in
the courts of the defaulting government, and legal recourse is therefore
somewhat diminished.

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<PAGE>

Political conditions, in terms of a government's willingness to meet the terms
of its debt obligations, also are of considerable significance. There can be no
assurance that the holders of commercial bank debt may not contest payments to
the holders of debt securities issued by governments in emerging markets in the
event of default by the governments under commercial bank loan agreements.

MANAGEMENT OF THE FUND

The management of the Fund's business and affairs is the responsibility of
the Fund's Board of Directors. Security Management Company, LLC (the
"Investment Manager"), 700 SW Harrison, Topeka, Kansas 66636-0001, is
responsible for selection and management of the Fund's portfolio investments.
The Investment Manager is a limited liability company, which is ultimately
controlled by Security Benefit Life Insurance Company, a mutual life insurance
company. The Investment Manager also acts as investment adviser to Security
Growth and Income Fund, Security Ultra Fund, Security Income Fund, Security
Cash Fund, Security Equity Fund, and Security Tax-Exempt Fund. The Investment
Manager currently manages $3.5 billion in assets.
The Investment Manager has engaged Lexington Management Corporation
("Lexington"), Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663, to
provide investment advisory services to Series D and Series K of the Fund.
Pursuant to the agreements, Lexington furnishes investment advisory,
statistical and research facilities, supervises and arranges for the purchase
and sale of securities on behalf of Series D and K and provides for the
compilation and maintenance of records pertaining to such investment advisory
services, subject to the control and supervision of the Board of Directors of
the Fund and the Investment Manager. Lexington is a wholly-owned subsidiary of
Lexington Global Asset Managers, Inc., a Delaware corporation with offices at
Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663. Descendants of
Lunsford Richardson, Sr., their spouses, trusts and other related entities have
a majority voting control of the outstanding shares of Lexington Global Asset
Managers, Inc. Lexington which was established in 1938 currently serves as an
investment adviser, Sub-adviser and/or sponsor to 21 investment companies with
varying objectives and manages over $3.8 billion in assets.
Lexington has entered into a sub-advisory contract with MFR Advisors, Inc.
("MFR"), One Liberty Plaza, New York, New York 10006, under which MFR will
provide Series K with investment and economic research services. MFR has been
an investment adviser since 1992 and currently acts as investment adviser to
Global High Yield Fund, Global Asset Allocation Fund and Emerging Markets Total
Return Fund, a sub-adviser to the Lexington Ramirez Global Income Fund and also
serves as an institutional manager for private clients. MFR is a subsidiary of
Maria Fiorini Ramirez, Inc. ("Ramirez"), which was established in August of
1992 to provide global economic consulting services. Ramirez owns 80 percent
and Security Benefit Group, Inc. ("SBG") owns 20 percent of the outstanding
common stock of MFR. Maria Fiorini Ramirez owns 100 percent of the outstanding
capital stock of Ramirez, and Security Benefit Life Insurance Company owns 100
percent of the outstanding common stock of SBG.
The Investment Manager has entered into a sub-advisory agreement with
Meridian Investment Management Corporation ("Meridian"), 12835 East Arapahoe
Road, Tower II, 7th Floor, Englewood, Colorado 80112. Pursuant to the
agreement, Meridian furnishes investment advisory, statistical and research
facilities, supervises and arranges for the purchase and sale of equity
securities on behalf of Series M and provides for the compilation and
maintenance of records pertaining to such investment advisory services, subject
to the control and supervision of the Board of Directors of the Fund and the
Investment Manager. Meridian is a wholly-owned subsidiary of Meridian
Management & Research Corporation which is controlled by its two stockholders,
Michael J. Hart and Craig T. Callahan.
The Investment Manager has engaged T. Rowe Price Associates, Inc. ("T.
Rowe Price"), 100 East Pratt Street, Baltimore, Maryland 21202, organized in
1937 under the laws of the state of Maryland by the late Thomas Rowe Price,
Jr., to provide investment advisory services to Series N and Series O. Pursuant
to the agreements, T. Rowe Price furnishes investment advisory services,
supervises and arranges for the purchase and sale of securities on behalf of
Series N and O and provides for the compilation and maintenance of records
pertaining to such investment advisory services, subject to the control and
supervision of the Board of Directors of the Fund and the Investment Manager.
T. Rowe Price is a publicly held company, which with its affiliates manages
over $95 billion in assets for over 4.5 million individual and institutional
investor accounts.
The Investment Manager has engaged Strong Capital Management, Inc.
("Strong"), 900 Heritage Reserve, Menomonee Falls, Wisconsin 53051, to provide
certain investment advisory services to Series X. Strong is a privately held
corporation which is controlled by Richard S. Strong. Strong was established in
1974 and currently manages over $27 billion in assets.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Manager manages the Fund's portfolios in accordance with each
Series' stated investment objective and policies and makes all investment
decisions, except that as to Series D and K of the Fund, the Investment Manager
supervises such management of those Series by Lexington, as to Series M,
supervises management of the Series by Meridian, as to Series N and O,
supervises management of those Series by T. Rowe Price, and as to Series X,
supervises management of the Series by Strong. As compensation for its
management services, the Investment Manager receives on an annual basis, an
amount equal to .75 percent of the average net assets of Series A, B, E, S, J,
K, P, and V; .50 percent of the average net assets of Series C;

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<PAGE>

and 1.00 percent of the average net assets of Series D, M, N, O, and X computed
on a daily basis and payable monthly.
The Investment Manager pays Lexington an annual fee equal to .50 percent
of the average net assets of Series D and .35 percent of the average net assets
of Series K, respectively, for management services provided to Series D and K.
For the services provided to Lexington by MFR, MFR, receives from Lexington, on
an annual basis, a fee equal to .15 percent of the average net assets of Series
K, calculated daily and payable monthly.
The Investment Manager pays T. Rowe Price an annual fee equal to .50
percent of the first $50,000,000 of average net assets of Series N and .40
percent of the average net assets of Series N in excess of $50,000,000 for
management services provided to that Series. Such fee is calculated daily and
payable monthly. The Investment Manager pays T. Rowe Price an annual fee equal
to .50 percent of the first $20,000,000 of average net assets of Series O and
.40 percent of such assets in excess of $20,000,000 for management services
provided to Series O. For any month in which the average daily net assets of
Series O exceeds $50,000,000, T. Rowe Price will waive .10 percent of its
investment management fee on the first $20,000,000 of average net assets of the
Series. Such fee is calculated daily and payable monthly.
The Investment Manager pays Meridian an annual fee equal to a percentage
of the average daily closing value of the net assets of Series M, computed on a
daily basis, according to the following schedule:

Average Daily Net Assets of the Series Annual Fee
- -------------------------------------- ----------
Less than $100 Million...................... .40%, plus
$100 Million, but less than $200 Million.... .35%, plus
$200 Million, but less than $400 Million.... .30%, plus
$400 Million or more........................ .25%

The Investment Manager pays Strong with respect to Series X, an annual fee
based on the combined average net assets of Series X and another fund to which
Strong provides advisory services. The fee is equal to .50 percent of the
combined average net assets under $150 million, .45 percent of the combined
average net assets at or above $150 million but less than $500 million, and .40
percent of the combined average net assets at or above $500 million.
The Investment Manager also acts as administrative agent for each Series
of the Fund, and as such performs administrative functions, bookkeeping,
accounting and pricing functions for the Fund. For providing these services,
the Investment Manager receives on an annual basis a fee of .045 percent of the
average daily net assets of the Fund except for Series X the Investment Manager
receives on an annual basis a fee of .09 percent of the average daily net
assets of the Series. For these services, the Investment Manager also receives,
with respect to Series D, K, M and N, an annual fee equal to the greater of .10
percent of each Series' average net assets or $60,000.
The expense ratio of each Series for the fiscal year ended December 31,
1996, was as follows: Series A - .83 percent; Series B - .84 percent; Series C
- - .58 percent; Series D - 1.30 percent; Series E - .83 percent; Series S - .84
percent; Series J - .84 percent; Series K - .84 percent; Series M - 1.34
percent; Series N - 1.45 percent; and Series O - 1.15 percent. The annualized
expense ratio of Series P for the period August 5, 1996 (date of inception) to
December 31, 1996, was .28 percent. The annualized expense ratio for Series V
for the period May 1, 1997 (date of inception) to August 31, 1997 was .55%.
The expense ratio for Series X is not yet available as it did not begin
operations until October of 1997. During the fiscal year ended December 31,
1996, the Investment Manager waived the management fee of Series K and P, and
during the fiscal year ending December 31, 1997, the Investment Manager will
waive the management fee of Series K, P, V and X. In the absence of such
waivers, the expense ratios for Series K , P and V would have been higher.

PORTFOLIO MANAGEMENT

SERIES A (GROWTH SERIES) is managed by the Large Capitalization Team of
the Investment Manager consisting of John Cleland, Chief Investment Strategist,
Terry Milberger, Jim Schier and Chuck Lauber. The Large Capitalization Team is
responsible for determining general investment strategy and monitoring
portfolio guidelines. Terry Milberger, Senior Portfolio Manager, has day-to-day
responsibility for managing Series A and has managed the Series since 1989. The
common stock portion of the SERIES B (GROWTH-INCOME SERIES) portfolio is
managed by the Investment Manager's Large Capitalization Team described above.
Mr. Milberger has day-to-day responsibility for managing the common stock
portion of the Series B portfolio and has managed this portion of the Series'
portfolio since 1995. The fixed income portion of the Series B portfolio is
managed by the Fixed Income Team of the Investment Manager consisting of John
Cleland, Jane Tedder, Tom Swank, Steve Bowser, Barb Davison, David Eshnaur,
Elaine Miller and Paulette Schwerdt. The Fixed Income Team is responsible for
determining general investment strategy and monitoring portfolio guidelines.
Tom Swank, Portfolio Manager, has day-to-day responsibility for managing the
fixed income portion of Series B's portfolio and has managed this portion of
the portfolio since 1994. SERIES D (WORLDWIDE EQUITY SERIES) is managed by an
investment management team of Lexington. Richard T. Saler and Alan Wapnick have
the day-to-day responsibility for managing the investments of Series D and have
managed the Series since 1994. SERIES E (HIGH GRADE INCOME SERIES) is managed
by the Fixed Income Team described above. Tom Swank and Steve Bowser have
day-to-day responsibility for managing Series E and have managed the Series
since June 1997. SERIES J (EMERGING GROWTH SERIES) and SERIES S (SOCIAL
AWARENESS SERIES) are managed by the Investment Manager's Small Capitalization
Team and Social

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<PAGE>

Responsibility Team, respectively, each of which consists of John Cleland,
Chief Investment Strategist, Cindy Shields, Larry Valencia and Frank Whitsell.
The Small Capitalization Team and the Social Responsibility Team are
responsible for determining general investment strategy and monitoring
portfolio guidelines. Cindy Shields, Portfolio Manager, has day-to-day
responsibility for managing Series J and Series S and has managed the Series
since 1994. SERIES K (GLOBAL AGGRESSIVE BOND SERIES) is managed by an
investment management team of Lexington and MFR. Denis P. Jamison and Maria
Fiorini Ramirez have day-to-day responsibility for managing Series K and have
managed the Series since its inception in 1995. SERIES M (SPECIALIZED ASSET
ALLOCATION SERIES) is managed by an investment management team of portfolio
managers of the Investment Manager and Sub-Adviser. Jane Tedder, Senior
Economist of the Investment Manager, has day-to-day responsibility for managing
the fixed-income portion of the Series' portfolio and has had responsibility
for the Series since January 1996. Pat Boyle, Portfolio Manager of Meridian,
has day-to-day responsibility for managing the equity portion of the Series'
portfolio. He has had day-to-day responsibility for managing the equity portion
of the Series since August 1997. SERIES N (MANAGED ASSET ALLOCATION SERIES) is
managed by an Investment Advisory Committee of T. Rowe Price consisting of
Edmund M. Notzon, Chairman, Heather R. Landon, James M. McDonald, Jerome Clark,
Peter Van Dyke, M. David Testa and Richard T. Whitney. Mr. Notzon has had
day-to-day responsibility for managing the Series since its inception in 1995.
SERIES O (EQUITY INCOME SERIES) is managed by an Investment Advisory Committee
of T. Rowe Price consisting of Brian C. Rogers, Chairman, Thomas H. Broadus,
Jr., Richard P. Howard and William J. Stromberg. Mr. Rogers has had day-to-day
responsibility for managing the Series since its inception in 1995. SERIES P
(HIGH YIELD SERIES) is managed by the Fixed Income Team described above. Tom
Swank and David Eshnaur have day-to-day responsibility for managing Series P.
Mr. Swank has managed the Series since its inception in 1996 and Mr. Eshnaur
has managed the Series since July 1997. SERIES V (VALUE SERIES) is managed by
the Large Capitalization Team described above. Jim Schier has day-to-day
responsibility for managing Series V and has managed the Series since its
inception in 1997. SERIES X (SMALL CAP SERIES) is managed by Ronald C. Ognar of
Strong. He has had day-to-day responsibility for managing Series X since its
inception in 1997.
Steve Bowser is Assistant Vice President and Portfolio Manager of the
Investment Manager. Prior to joining the Investment Manager in 1992, he was
Assistant Vice President and Portfolio Manager with Federal Home Loan Bank of
Topeka from 1989 to 1992. He was employed at the Federal Reserve Bank of Kansas
City in 1988 and began his career with the Farm Credit System from 1982 to
1987, serving as Senior Financial Analyst and Assistant Controller. He
graduated with a Bachelor of Science degree from Kansas State University in
1982. He is a Chartered Financial Analyst.
Pat Boyle is a Research Analyst and Portfolio Manager at Meridian. He has
four years of investment experience and is a Chartered Financial Analyst. Mr.
Boyle graduated from the University of Denver with a B.S.B.A. degree in
Finance.
John D. Cleland has been involved in the securities industry for more than
30 years. Before joining the Investment Manager in 1968, he was involved in the
investment business in securities and residential and commercial real estate
for approximately ten years. Mr. Cleland earned a Bachelor of Science degree
from the University of Kansas and an M.B.A. from Wharton School of Finance,
University of Pennsylvania.
David Eshnaur is Assistant Vice president and Portfolio Manager of the
Investment Manager. Prior to joining the Investment Manager in 1997, he worked
at Waddell & Reed in the positions of assistant Vice President, Assistant
Portfolio Manager, Senior Analyst, Industry Analyst and Account Administrator.
Mr. Eshnaur earned a Bachelor of Arts degree in Business Administration from
Coe College and an M.B.A. degree in Finance from the University of Missouri -
Kansas City.
Denis P. Jamison, C.F.A., Senior Vice President, Director Fixed Income
Strategy, is responsible for fixed-income portfolio management for Lexington.
He is a member of the New York Society of Security Analysts. Mr. Jamison has
more than 20 years investment experience. Prior to joining Lexington in 1981,
Mr. Jamison had spent nine years at Arnold Bernhard & Company, an investment
counseling and financial services organization. At Bernhard, he was a Vice
President supervising the security analyst staff and managing investment
portfolios. He is a specialist in government, corporate and municipal bonds.
Mr. Jamison is a graduate of the City College of New York with a B.A. in
Economics.
Terry A. Milberger is a Vice President and Senior Portfolio Manager of the
Investment Manager. Mr. Milberger has more than 20 years of investment
experience. He began his career as an investment analyst in the insurance
industry and from 1974 through 1978 he served as an assistant portfolio manager
for the Investment Manager. He was then employed as Vice President of Texas
Commerce Bank and managed its pension fund assets until he returned to the
Investment Manager in 1981. Mr. Milberger holds a bachelor's degree in business
and an M.B.A. from the University of Kansas and is a Chartered Financial
Analyst. His investment philosophy is based on patience and opportunity for the
long-term investor.
Edmund M. Notzon joined T. Rowe Price in 1989 and has been managing
investments since 1991. Prior to joining T. Rowe Price, Mr. Notzon was Director
of the Analysis and Evaluation Division at the U.S. Environmental Protection
Agency.
Ronald C. Ognar, Portfolio Manager of Strong, is a Chartered Financial
Analyst with more than 25 years of investment experience. Mr. Ognar joined
Strong in April

36
<PAGE>

1993 after two years as a principal and portfolio manager with RCM Capital
Management. Prior to his position at RCM Capital Management, he was a portfolio
manager at Kemper Financial Services in Chicago. Mr. Ognar began his investment
career in 1968 at LaSalle National Bank. He is a graduate of the University of
Illinois with a bachelor's degree in accounting.
Maria Fiorini Ramirez, President and Chief Executive Officer of MFR, began
her career as a credit analyst with American Express International Banking
Corporation in 1968. In 1972, she moved to Banco Nazionale De Lavoro in New
York. The following year, she started a ten year association with Merrill
Lynch, serving as Vice President and Senior Money Market Economist. She joined
Becker Paribas in 1984 as Vice President and Senior Money Market Economist
before joining Drexel Burnham Lambert that same year as First Vice President
and Money Market Economist. She was promoted to Managing Director of Drexel in
1986. From April 1990 to August 1992, Ms. Ramirez was the President and Chief
Executive Officer of Maria Ramirez Capital Consultants, Inc., a subsidiary of
John Hancock Freedom Securities Corporation. Ms. Ramirez established MFR in
August, 1992. She is known in international financial, banking and economic
circles for her assessment of the interaction between global economic policy
and political trends and their effect on investments. Ms. Ramirez holds a B.A.
in Business Administration/ Economics from Pace University.
Brian C. Rogers joined T. Rowe Price in 1982 and has been managing
investments since 1983.
Richard T. Saler is a Senior Vice President of Lexington and is
responsible for international investment analysis and portfolio management. He
has eleven years of investment experience. Mr. Saler has focused on
international markets since first joining Lexington in 1986. Most recently he
was a strategist with Nomura Securities and rejoined Lexington in 1992. Mr.
Saler is a graduate of New York University with a B.S. degree in Marketing and
an M.B.A. in Finance from New York University's Graduate School of Business
Administration.
James P. Schier, Portfolio Manager of the Investment Manager, has 13 years
experience in the investment field and is a Chartered Financial Analyst. While
employed by the Investment Manager, he also served as a research analyst. Prior
to joining the Investment Manager in 1995, he was a portfolio manager for
Mitchell Capital Management from 1993 to 1995. From 1988 to 1995 he served as
Vice President and Portfolio Manager for Fourth Financial. Prior to 1988, Mr.
Schier served in various positions in the investment field for Stifel
Financial, Josepthal & Company and Mercantile Trust Company. Mr. Schier earned
a bachelor of business degree from the University of Notre Dame and an M.B.A.
from Washington University.
Cindy L. Shields, Portfolio Manager of the Investment Manager, has eight
years experience in the securities field. Ms. Shields has been a portfolio
manager since 1994, and prior to that time, she served as a research analyst
for the Investment Manager. She is a Chartered Financial Analyst. Ms. Shields
graduated from Washburn University with a Bachelor of Business Administration
degree, majoring in finance and economics. She joined the Investment Manager in
1989.
Tom Swank, Portfolio Manager of the Investment Manager, has over ten years
of experience in the investment field. He is a Chartered Financial Analyst.
Prior to joining the Investment Manager in 1992, he was an Investment
Underwriter and Portfolio Manager for U.S. West Financial Services, Inc. from
1986 to 1992. From 1984 to 1986, he was a Commercial Credit Officer for United
Bank of Denver. From 1982 to 1984, he was employed as a Bank Holding Company
examiner for the Federal Reserve Bank of Kansas City - Denver Branch. Mr. Swank
graduated from Miami University in Ohio with a Bachelor of Science degree in
Finance in 1982 and earned a Master of Business Administration degree from the
University of Colorado.
Jane Tedder, Senior Economist of the Investment Manager, has 20 years of
experience in the investment field. Ms. Tedder has been a portfolio manager for
the Investment Manager since 1983. Prior to joining the Investment Manager in
1983, she served as Vice President and Trust Officer of Douglas County Bank in
Kansas. Ms. Tedder earned a bachelor's degree in education from Oklahoma State
University and advanced diplomas from National Graduate Trust School,
Northwestern University, and Stonier Graduate School of Banking, Rutgers
University. She is a Chartered Financial Analyst.
Alan Wapnick is a Senior Vice President of Lexington and is responsible
for equity analysis and portfolio management. He has 27 years investment
experience. Prior to joining Lexington in 1986, Mr. Wapnick was an equity
analyst with Merrill Lynch, J. & W. Seligman, Dean Witter and most recently
Union Carbide Corporation. Mr. Wapnick is a graduate of Dartmouth College and
received a Master's degree in Business Administration from Columbia University.

SALE AND REDEMPTION OF SHARES

Shares of the Fund will be sold to SBL for allocation to variable annuity
or variable life separate accounts. Shares are sold and redeemed at their net
asset value next determined after receipt of a purchase or redemption order. No
sales or redemption charge is made. The value of shares redeemed may be more or
less than the stockholder's cost, depending upon the market value of the
portfolio securities at the time of redemption. Payment for shares redeemed
will be made as soon as practicable after receipt, but in no event later than
seven days after tender, except that the Fund may suspend the right of
redemption during any period when trading on the New York Stock Exchange is
restricted or such Exchange is closed for other than weekends or holidays, or
any emergency is deemed to exist by the Securities and Exchange Commission.

37
<PAGE>

DISTRIBUTIONS AND FEDERAL INCOME TAX CONSIDERATIONS

Each Series intends to separately qualify and elects to be treated each
year as a "regulated investment company" under Subchapter M of the Internal
Revenue Code (the "Code") and, therefore, generally will not be liable for
federal income taxes to the extent its net investment income and capital gains
are distributed. The Fund expects to distribute, at least once a year,
substantially all of each Series' net investment income and net realized
capital gains. Such distributions will be reinvested on the payable date in
additional shares of the respective Series at the net asset value thereof as of
the record date (reduced by an amount equal to the amount of the distribution),
unless the shareholder elects to receive cash. Each Series will be treated
separately in determining the amounts of income and capital gains distributions
to the variable life insurance accounts and the variable annuity accounts. For
this purpose, each Series will reflect only the income and gains, net of
losses, of that Series.
To comply with regulations under Code section 817(h), each Series is
required to diversify its investments. Generally, a Series will be required to
diversify its investments so that on the last day of each quarter of the
calendar year no more than 55 percent of the value of the total assets is
represented by any one investment, no more than 70 percent is represented by
any two investments, no more than 80 percent is represented by any three
investments, and no more than 90 percent is represented by any four
investments. If a Series fails to meet the diversification requirements under
Code section 817(h), income with respect to life insurance policies and annuity
contracts invested in the Series at any time during the calendar quarter in
which the failure occurred could become currently taxable to the owners of such
policies and contracts and income for prior periods with respect to the
policies and contracts also could be taxable, most likely in the year of the
failure to achieve the required diversification. Other adverse tax consequences
could also ensue. If a Series fails to qualify as a regulated investment
company, the results would be substantially the same as a failure to meet the
diversification requirements under Code section 817(h).
Certain requirements relating to the qualification of a Series as a
regulated investment company and to the satisfaction of the Code section 817(h)
diversification requirements may limit the extent to which a Series will be
able to engage in certain investment practices, including transactions in
options, futures contracts, forwards, swaps and other types of derivative
securities transactions. In addition, if a Series were unable to dispose of
portfolio securities due to settlement problems relating to foreign investments
or due to the holding of illiquid securities, the Series' ability to qualify as
a regulated investment company and to satisfy the Code section 817(h)
diversification requirements might be affected.
See "Distributions and Federal Income Tax Considerations" in the Statement
of Additional Information for more information on taxes, including information
on the taxation of distributions from a Series. The federal tax consequences to
purchasers of SBL's variable annuity contracts and variable life insurance
policies registered under the Securities Act of 1933 are described in the
prospectus applicable to such contracts and such policies, respectively.

FOREIGN TAXES

Investment income and gains received from sources within foreign countries
may be subject to foreign income and other taxes. In this regard, withholding
tax rates in countries with which the United States does not have a tax treaty
are often as high as 30 percent or more. The United States has entered into tax
treaties with many foreign countries which entitle certain investors to a
reduced tax rate (generally 10 to 15 percent) or to certain exemptions from
tax. The Fund intends to operate so as to qualify for such reduced tax rates or
tax exemptions whenever possible. While policyholders and contractowners will
indirectly bear the cost of any foreign tax withholding, they will not be able
to claim foreign tax credit or deduction for taxes paid by the Fund.

DETERMINATION OF NET ASSET VALUE

The net asset value per share of each Series is determined as of the close
of regular trading hours on the New York Stock Exchange on each day that the
Exchange is open for trading (normally 3:00 p.m. Central time). The
determination is made by dividing the value of the portfolio securities of each
Series, plus any cash or other assets, less all liabilities, by the number of
shares of each Series outstanding. Securities listed or traded on a recognized
securities exchange will be valued on the basis of the last sales price. If
there are no sales on a particular day, then the securities are valued at the
last bid price. If a security is traded on multiple exchanges, its value will
be based on prices from the principal exchange where it is traded. All other
securities for which market quotations are available are valued on the basis of
the last current bid price. If there is no bid price or if the bid price is
deemed unsatisfactory by the Board of Directors or by the Investment Manager,
then the securities are valued in good faith by such method as the Board of
Directors determines will reflect the fair market value.
The Fund will generally value short-term securities at prices based on
market quotations for securities of similar type, yield, quality and duration,
except that securities with 60 days or less to maturity may be valued on the
basis of the amortized cost valuation technique. The amortized cost valuation
technique involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the

38
<PAGE>

impact of fluctuating interest rates on the market value of the instrument.
A similar procedure may be used for portfolio instruments when they reach
60 days to maturity, with the value of the instrument on the 61st day being
used rather than cost. While this method provides certainty in valuation, it
may result in periods during which value (as determined by amortized cost) is
higher or lower than the price the Fund would receive if the security were
sold.
Generally, trading in foreign securities markets is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of foreign securities used in computing the net asset
value of the shares of Series investing in foreign securities generally are
determined as of the close of such foreign markets or the close of the New York
Stock Exchange if earlier. Foreign currency exchange rates are generally
determined prior to the close of the New York Stock Exchange. Trading on
foreign exchanges and in foreign currencies may not take place on every day the
New York Stock Exchange is open. Conversely trading in various foreign markets
may take place on days when the New York Stock Exchange is not open and on
other days when the Fund's net asset values are not calculated. Consequently,
the calculation of the net asset value may not occur contemporaneously with the
determination of the most current market prices for the securities included in
such calculation, and events affecting the value of such securities and such
exchange rates that occur between the times at which they are determined and
the close of the New York Stock Exchange will not be reflected in the
computation of net asset value. If during such periods, events occur that
materially affect the value of such securities, the securities will be valued
at their fair market value as determined in good faith by the Board of
Directors.
For purposes of determining the net asset value per share of the Fund, all
assets and liabilities initially expressed in foreign currencies will be
converted into United States dollars at the mean between the bid and offer
prices of such currencies against United States dollars quoted by any major
U.S. bank.

TRADING PRACTICES AND BROKERAGE

The annual portfolio turnover rate of Series A, S, J, M and V may exceed
100 percent, and at times may exceed 150 percent. The annual turnover rate of
Series E and K may exceed 100 percent. The annual turnover rate of Series B, D,
N, O and P generally will not exceed 100 percent. Since Series C's investment
policies require a maturity shorter than thirteen months, its portfolio
turnover rate will generally be 0 percent, although the portfolio will turn
over many times during a year as a result of security maturities. The portfolio
turnover of Series X is not expected to exceed 200 percent.
The portfolio turnover rates of the Series for the fiscal year ended
December 31, 1996 were as follows: Series A - 57 percent; Series B - 58
percent; Series D - 115 percent; Series E - 232 percent; Series S - 67 percent;
Series J - 123 percent; Series K - 86 percent; Series M - 40 percent; Series N
- - 41 percent; and Series O - 22 percent. The annualized portfolio turnover rate
for Series P for the period August 5, 1996 (date of inception) to December 31,
1996 was 151 percent. The annualized portfolio turnover rate for Series V for
the period May 1, 1997 (date of inception) to August 31, 1997 was 48 percent.
The portfolio turnover rates for Series A, B, D, E, S and J for the fiscal
year ended December 31, 1995 were 83 percent, 94 percent, 169 percent, 180
percent, 122 percent and 202 percent, respectively. The annualized portfolio
turnover rates for Series K, M, N and O for the period June 1, 1995 (date of
inception) to December 31, 1995 were 127 percent, 181 percent, 26 percent and 3
percent, respectively. Higher portfolio turnover subjects the Series to
increased brokerage costs and may in some cases, have adverse tax effects on
the Series or its stockholders. The portfolio turnover rate for Series X is not
yet available as it did not begin operations until October of 1997.
The rates of portfolio turnover may be substantially higher during any
period when changing market or economic conditions suggest a shift in portfolio
emphasis. Thus, a portfolio turnover rate in excess of 100 percent will not
necessarily indicate a variation from the stated investment policy.
Transactions in portfolio securities are effected in the manner deemed to
be in the best interest of the Series. In selecting a broker to execute a
specific transaction, all relevant factors will be considered such as the
broker's ability to obtain the best execution of a particular transaction.
Portfolio transactions may be directed to brokers who furnish investment
information or research services to the Investment Manager or who sell shares
of the Series. Although the Investment Manager may consider sales of shares of
the Series in the selection of a broker, this will not be a qualifying or
disqualifying factor.
Securities held by the Fund may also be held by other investment advisory
clients of the Investment Manager, including other investment companies, and by
Security Benefit Life Insurance Company ("SBL"). Purchases or sales of the same
security occurring on the same day (which may include orders from SBL) may be
aggregated and executed as a single transaction, subject to the Investment
Manager's obligation to seek best execution. Aggregated purchases or sales are
generally effected at an average price and on a pro rata basis (transaction
costs will also be shared on a pro rata basis) in proportion to the amounts
desired to be purchased or sold. See the Fund's Statement of Additional
Information for a more detailed description of aggregated transactions and
allocation of portfolio brokerage.

PERFORMANCE INFORMATION

The Fund may, from time to time, include the average annual total return
and total return of all Series in

39
<PAGE>

advertisements or reports to stockholders or prospective investors. Quotations
of average annual total return for any Series will be expressed in terms of the
average annual compounded rate of return on a hypothetical investment in the
Series over a period of 1, 5, and 10 years (up to the life of the Series), and
will assume that all dividends and distributions are reinvested when paid.
Quotations of total return for any Series will be based on a hypothetical
investment in the Series for a certain period, and will assume that all
dividends and distributions are reinvested when paid. The net increase or
decrease in the value of the investment over the period will be divided by its
beginning value to arrive at total return for the period. Total return
calculated in this manner will differ from the average annual total return in
that it is not expressed in terms of an average rate of return.
Performance information for a Series may be compared, in reports and
promotional literature, to: (i) The Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), or other unmanaged indices so
that investors may compare a Series' results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (ii) other groups of mutual funds tracked by Lipper
Analytical Services, a widely used independent research firm which ranks mutual
funds by overall performance, investment objectives, and assets, or tracked by
other services, companies, publications, or persons who rank mutual funds on
overall performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an investment in
the Series. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
Quotations of average annual total return or total return for the Fund
will not take into account charges or deductions against the Separate Accounts
to which the Fund shares are sold or charges and deductions against the
Contracts issued by Security Benefit Life Insurance Company. Performance
information for any Series reflects only the performance of a hypothetical
investment in the Series during a particular time period on which the
calculations are based. Performance information should be considered in light
of the Series' investment objectives and policies, characteristics and quality
of the portfolios, and the market conditions during the given time period, and
should not be considered as a representation of what may be achieved in the
future. For a description of the methods used to determine average annual total
return and total return for the Series, see the Statement of Additional
Information.

GENERAL INFORMATION

ORGANIZATION

SBL Fund has authorized the issuance of an indefinite number of shares of
capital stock of $1.00 par value. The Fund's shares are currently issued in
fourteen Series A, B, C, D, E, S, J, K, M, N, O, P, V and X. The shares of each
Series represent a pro rata beneficial interest in that Series' net assets and
in the earnings and profits or losses derived from the investment of such
assets.
Upon issuance and sale, such shares will be fully paid, nonassessable and
redeemable. These shares have no preemptive rights, but the shareholders of
each Series are entitled to receive dividends as declared for that Series by
the Board of Directors of the Fund.
The shares of each Series have cumulative voting rights for the election
of directors. On matters affecting a particular Series, each share of that
Series has equal voting rights with each other share and there are no
preferences as to conversion, exchange, retirement or liquidation. On other
matters, all shares (irrespective of Series) are entitled to one vote each.
Pursuant to the rules and regulations of the Securities and Exchange
Commission, in certain instances a vote of the outstanding shares of the
combined Series may not modify the rights of holders of a particular Series
without the approval of a majority of the shares of that Series.
The Fund does not generally hold annual meetings of stockholders and will
do so only when required by law. Stockholders may remove directors from office
by votes cast in person or by proxy at a meeting of stockholders. Such a
meeting will be called at the written request of the holders of 10 percent of
the Fund's outstanding shares.

CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT

UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri, acts as the
custodian for the portfolio securities of Series A, B, C, E, S, J, P, V and X.
The Chase Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, New York 11245
acts as custodian for the portfolio securities of Series D, K, M, N, and O,
including those held by foreign banks and foreign securities depositories which
qualify as eligible foreign custodians under rules adopted by the Securities
and Exchange Commission. Security Management Company, LLC acts as the Fund's
transfer and dividend-paying agent.

CONTRACTOWNER INQUIRIES

Contractowners who have questions concerning the Fund or wish to obtain
additional information, may write to SBL Fund at 700 SW Harrison St., Topeka,
Kansas 66636-0001, or call (785) 431-3127 or 1-800-888-2461, extension 3127.

40
<PAGE>

SBL FUND

STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 15, 1997
RELATING TO THE SBL FUND PROSPECTUS DATED OCTOBER 15, 1997
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME
(785) 431-3127
(800) 888-2461

INVESTMENT MANAGER
Security Management Company, LLC
700 SW Harrison Street
Topeka, Kansas 66636-0001

CUSTODIAN
UMB Bank, N.A.
928 Grand Avenue
Kansas City, Missouri 64106

The Chase Manhattan Bank
4 Chase MetroTech Center
Brooklyn, New York 11245

INDEPENDENT AUDITORS
Ernst & Young LLP
One Kansas City Place
1200 Main Street
Kansas City, Missouri 64105-2143

<PAGE>

SBL FUND

A Member of The Security Benefit Group of Companies
700 SW Harrison, Topeka, Kansas 66636-0001

STATEMENT OF
ADDITIONAL INFORMATION
OCTOBER 15, 1997
(RELATING TO THE PROSPECTUS DATED OCTOBER 15, 1997,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME)

This Statement of Additional Information is not a Prospectus. It should
be read in conjunction with the SBL Fund Prospectus dated October 15, 1997, as
it may be supplemented from time to time. A Prospectus may be obtained by
writing or calling the Fund, 700 SW Harrison, Topeka, Kansas 66636-0001, or by
calling (785) 431-3127 or (800) 888-2461, ext. 3127.

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page

<S> <C> <C> <C>
What is SBL Fund?............................................ 1 Remuneration of Directors and Others.......... 54
Investment Objectives and Policies of the Series............. 1 Sale and Redemption of Shares................. 55
Series A (Growth Series)................................... 2 Investment Management......................... 55
Series B (Growth-Income Series)............................ 2 Portfolio Management........................ 58
Series C (Money Market Series)............................. 3 Code of Ethics.............................. 61
Series D (Worldwide Equity Series)......................... 5 Portfolio Turnover............................ 61
Series E (High Grade Income Series)........................ 7 Determination of Net Asset Value.............. 62
Series J (Emerging Growth Series).......................... 8 Portfolio Transactions........................ 63
Series K (Global Aggressive Bond Series)................... 9 Distributions and Federal Income Tax
Series M (Specialized Asset Allocation Series)............. 14 Considerations.............................. 64
Series N (Managed Asset Allocation Series)................. 15 Ownership and Management...................... 67
Series O (Equity Income Series)............................ 19 Capital Stock and Voting...................... 67
Series P (High Yield Series)............................... 21 Custodian, Transfer Agent and Dividend-Paying
Series S (Social Awareness Series)......................... 22 Agent....................................... 68
Series V (Value Series).................................... 23 Independent Auditors.......................... 68
Series X (Small Cap Series)................................ 24 Distribution of Variable Insurance Products... 68
Investment Methods and Risk Factors.......................... 25 Performance Information....................... 68
Investment Policy Limitations................................ 50 Financial Statements.......................... 69
Officers and Directors....................................... 52 Appendix...................................... 71
</TABLE>

<PAGE>

WHAT IS SBL FUND?

SBL Fund (the "Fund"), a Kansas corporation, was organized by Security
Benefit Life Insurance Company ("SBL") on May 26, 1977, and serves as the
investment vehicle for certain SBL variable annuity and variable life insurance
separate accounts. Shares of the Fund will be sold to SBL for allocation to
such separate accounts which are established for the purpose of funding
variable annuity and variable life insurance contracts issued by SBL. The Fund
reserves the right to expand the class of persons eligible to purchase shares
of any Series of the Fund or to reject any offer.
The Fund is a diversified, open-end management investment company of the
series type registered under the Investment Company Act of 1940, which
currently issues its shares in fourteen series: Series A, Series B, Series C,
Series D, Series E, Series J, Series K, Series M, Series N, Series O, Series P,
Series S, Series V and Series X ("Series"). The assets of each Series are held
separate from the assets of the other Series and each Series has investment
objectives which differ from those of the other Series.
SBL, organized originally as a fraternal benefit society under the laws of
the State of Kansas, commenced business February 22, 1892, and became a mutual
life insurance company under its present name on January 2, 1950. Its home
office is located at 700 Harrison Street, Topeka, Kansas. SBL is licensed in
the District of Columbia and all states except New York.
All investment companies are required to operate within the limitations
imposed by their fundamental investment policies. (See "Investment Objectives
and Policies of the Series," this page, and "Investment Policy Limitations,"
page 50.)
As an open-end investment company, the Fund provides an arrangement by
which investors may invest in a company which itself invests in securities.
Each Series represents a diversified securities portfolio under professional
management, and the value of shares held by SBL's separate accounts will
fluctuate with changes in the value of the Series' portfolio securities. As an
open-end company, the Fund is obligated to redeem its shares upon demand at
current net asset value. ( See "Sale and Redemption of Shares," page 55.)
Professional investment advice is provided to the Fund and to each Series
by Security Management Company, LLC (the "Investment Manager"), which is
ultimately controlled by SBL. The Investment Manager has engaged Lexington
Management Corporation ("Lexington") to provide certain investment advisory
services to Series D and Series K of the Fund. Lexington has entered into a
sub-advisory contract with MFR Advisors, Inc. ("MFR") to provide Series K with
investment and economic research services. The Investment Manager has engaged
T. Rowe Price Associates, Inc. ("T. Rowe Price") to provide certain investment
advisory services to Series N and O. The Investment Manager has engaged
Meridian Investment Management Corporation ("Meridian") to provide certain
investment advisory services to Series M and Strong Capital Management, Inc.
("Strong") to provide certain investment advisory services to Series X.
Pursuant to an investment advisory contract with the Fund, the Investment
Manager is paid an annual advisory fee of .75% of the average net assets of
Series A, Series B, Series E, Series S, Series J, Series K, Series P and Series
V; .5% of the average net assets of Series C; and 1.00% of the average net
assets of Series D, Series M, Series N, Series O and Series X, computed daily
and payable monthly, and the Investment Manager has agreed that the total
annual expenses of each Series (including the management compensation but
excluding brokerage commissions, interest, taxes and extraordinary expenses)
will not exceed any expense limitation imposed by any state. (See page for a
discussion of the Investment Manager and the Investment Advisory Contract.) The
Fund also receives administrative, accounting and transfer agency services from
the Investment Manager for which the Fund pays a fee.

INVESTMENT OBJECTIVES AND POLICIES OF THE SERIES

The investment objective and policies of each Series are described below.
There are risks inherent in the ownership of any security and there can be no
assurance that such objectives will be achieved. The objectives and policies,
except those enumerated under "Investment Policy Limitations," page , may be
modified at any time without stockholder approval.
To comply with regulations under Section 817(h) of the Internal Revenue
Code, each Series of the SBL Fund is required to diversify its investments so
that on the last day of each quarter of a calendar year no more than 55% of the
value of its assets is represented by securities of any one issuer, no more
than 70% is represented by securities of any two issuers, no more than 80% is
represented by securities of any three issuers, and no more

1
<PAGE>

than 90% is represented by securities of any four issuers. As to U.S.
Government securities, each U.S. Government agency and instrumentality is to be
treated as a separate issuer.

SERIES A (GROWTH SERIES)

The investment objective of Series A is to seek long-term capital growth
by investing in those securities which, in the opinion of the Investment
Manager, have the most long-term capital growth potential. Series A seeks to
achieve its objective by investing primarily in a broadly diversified portfolio
of common stocks (which may include American Depositary Receipts (ADRs) or
securities with common stock characteristics, such as securities convertible
into common stocks. See the discussion of ADRs and the risks associated with
investing in ADRs under "Investment Methods and Risk Factors." Series A may
also invest in preferred stocks, bonds and other debt securities. Income
potential will be considered to the extent doing so is consistent with Series
A's investment objective of long-term capital growth. Series A may invest its
assets temporarily in cash and money market instruments for defensive purposes.
Series A invests for long-term growth of capital and does not intend to place
emphasis upon short-term trading profits.
From time to time, Series A may purchase securities on a "when-issued" or
"delayed delivery basis" in excess of customary settlement periods for the type
of security involved. Securities purchased on a when-issued basis are subject
to market fluctuation and no interest or dividends accrue to the Series prior
to the settlement date. Series A will establish a segregated account with its
custodian bank in which it will maintain cash or liquid securities equal in
value to commitments for such when-issued or delayed delivery securities.
Series A may also invest up to 5% of its total assets in warrants (other than
those attached to other securities) which entitle the holder to buy equity
securities at a specific price during or at the end of a particular period. A
warrant ceases to have value if it is not exercised prior to its expiration
date.

SERIES B (GROWTH-INCOME SERIES)

The investment objective of Series B is to provide long-term growth of
capital with secondary emphasis on income. Assets of the Series may be
invested in various types of securities, which may include (i) securities
convertible into common stocks; (ii) preferred stocks; (iii) debt securities
issued by U.S. corporations; (iv) securities issued by the U.S. Government or
any of its agencies or instrumentalities, including Treasury bills,
certificates of indebtedness, notes and bonds; (v) securities issued by foreign
governments, their agencies, and instrumentalities, and foreign corporations,
provided that such securities are denominated in U.S. dollars; (vi) higher
yielding, high risk debt securities (commonly referred to as "junk bonds") and
zero coupon securities. In the selection of securities for investment, the
potential for appreciation and future dividends is given more weight than
current dividends. See the discussion of ADRs and the risks associated with
investing in ADRs under "Investment Methods and Risk Factors." From time to
time, Series B may purchase government bonds or commercial notes on a temporary
basis for defensive purposes.
With respect to its investment in debt securities, there is no percentage
limitation on the amount of Series B's assets that may be invested within any
particular rating classification. Series B may invest in higher yielding,
longer-term fixed-income securities in the lower rating (higher risk)
categories of the recognized rating services (commonly referred to as "junk
bonds"). These include securities rated Ba or lower by Moody's Investors
Service, Inc. or BB or lower by Standard & Poor's Corporation. Securities
rated Ba or lower by Moody's or BB or lower by Standard & Poor's are regarded
as predominantly speculative with respect to the ability of the issuer to meet
principal and interest payments. (See the Appendix for a description of the
various bond ratings utilized by the rating services.) However, the Investment
Manager will not rely principally on the ratings assigned by the rating
services. Because Series B will invest in lower rated securities and unrated
securities of comparable quality, the achievement of the Series' investment
objective may be more dependent on the Investment Manager's own credit analysis
than would be true if investing in higher rated securities.
To the extent that Series B invests in the high yield, high risk bonds
described above, its share price and yield are expected to fluctuate more than
the share price and yield of a fund investing in higher quality, shorter-term
securities. High yield bonds may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
bonds. A projection of an economic downturn, or higher interest rates, for
example, could cause a decline in high yield bond prices because an advent of
such events could lessen the ability of highly leveraged companies to make
principal and interest payments on its debt securities. In addition,

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SERIES B (CONTINUED)

the secondary trading market for high yield bonds may be less liquid than the
market for higher grade bonds, which can adversely affect the ability of the
Series to dispose of its portfolio securities. Bonds for which there is only a
"thin" market can be more difficult to value inasmuch as objective pricing data
may be less available and judgment may play a greater role in the valuation
process. See the discussion of the risks associated with investing in high
yield bonds under "Investment Methods and Risk Factors" - "Special Risks
Associated with Low-Rated and Comparable Unrated Bonds." The Series may
purchase securities that are restricted as to disposition under the federal
securities laws, provided that such securities are eligible for resale to
qualified institutional investors pursuant to Rule 144A under the Securities
Act of 1933 and subject to the Series' policy that not more than 10% of its
total assets will be invested in illiquid securities. See "Investment Methods
and Risk Factors" - "Restricted Securities."
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also are sold at substantial discounts
but provide for the commencement of regular interest payments at a deferred
date. See "Investment Methods and Risk Factors" for a discussion of zero coupon
securities.
As discussed above, Series B may invest in foreign debt securities that
are denominated in U.S. dollars. Such foreign debt securities may include debt
of foreign governments, including Brady Bonds, and debt of foreign
corporations. The Series expects to limit its investment in foreign debt
securities, excluding Canadian securities, to not more than 15% of its total
assets and its investment in debt securities of issuers in emerging markets,
excluding Brady Bonds, to not more than 5% of its net assets. Many emerging
market debt securities are not rated by United States rating agencies such as
Moody's and S&P and the majority of emerging market debt securities are
considered to have a credit quality below investment grade. The Series'
ability to achieve its investment objective is thus more dependent on the
credit analysis of the Series' Investment Manager than would be the case if the
Series were to invest only in higher quality bonds. See the discussion of the
risks associated with investing in foreign securities, emerging markets, and
Brady Bonds under "Investment Methods and Risk Factors."

SERIES C (MONEY MARKET SERIES)

The investment objective of Series C is to seek as high a level of current
income as is consistent with preservation of capital. The Series will attempt
to achieve its objective by investing at least 95% of its total assets,
measured at the time of investment, in a diversified portfolio of highest
quality money market instruments. The Series may also invest up to 5% of its
total assets, measured at the time of investment, in money market instruments
that are in the second-highest rating category for short-term debt obligations.
The Series may invest in money market instruments with maturities of not
longer than thirteen months, consisting of the following:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed (as to
principal or interest) by the United States Government or its agencies (such as
the Small Business Administration, the Federal Housing Administration and
Government National Mortgage Association), or instrumentalities (such as
Federal Home Loan Banks and Federal Land Banks), and instruments fully
collateralized with such obligations, such as repurchase agreements.
Some U.S. Government securities, such as treasury bills and bonds, 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 Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality.
BANK OBLIGATIONS. Obligations of banks or savings and loan associations
that are members of the Federal Deposit Insurance Corporation, and instruments
fully collateralized with such obligations, such as repurchase agreements.
CORPORATE OBLIGATIONS. Commercial paper issued by corporations and rated
Prime-1 or Prime-2 by Moody's Investors Service, Inc. or A-1 or A-2 by Standard
& Poor's Corporation, or other corporate debt instruments rated Aaa or Aa or
better by Moody's or AAA or AA or better by Standard & Poor's, subject to the
limitations on investment in instruments in the second-highest rating category,
discussed below. (See the Appendix for a description of the commercial paper
and corporate bond ratings.)

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SERIES C (CONTINUED)

Series C may invest in instruments having rates of interest that are
adjusted periodically according to a specified market rate for such investments
("Variable Rate Instruments"). The interest rate on a Variable Rate Instrument
is ordinarily determined by reference to, or is a percentage of, an objective
standard such as a bank's prime rate or the 91-day U.S. Treasury Bill rate.
The Series does not purchase certain Variable Rate Instruments that have a
preset cap above which the rate of interest may not rise. Generally, the
changes in the interest rate on Variable Rate Instruments reduce the
fluctuation in the market value of such securities. Accordingly, as interest
rates decrease or increase, the potential for capital appreciation or
depreciation is less than for fixed-rate obligations. Series C determines the
maturity of Variable Rate Instruments in accordance with Rule 2a-7 under the
Investment Company Act of 1940 which allows the Series to consider the maturity
date of such instruments to be the period remaining until the next readjustment
of the interest rate rather than the maturity date on the face of the
instrument.
Certain of the securities acquired by Series C may be restricted as to
disposition under federal securities laws, provided that such restricted
securities are eligible for resale pursuant to Rule 144A under the Securities
Act of 1933. Rule 144A, adopted by the Securities and Exchange Commission in
1990, provides a nonexclusive safe harbor exemption from the registration
requirements of the Securities Act for the resale of certain securities to
certain qualified buyers. One of the primary purposes of the Rule is to create
resale liquidity for certain securities that would otherwise be treated as
illiquid investments. In accordance with its investment policies, the Fund is
not permitted to invest more than 10% of its total net assets in illiquid
securities. The Investment Manager, under procedures adopted by the Board of
Directors, will determine whether securities eligible for resale under Rule
144A are liquid or not. Investing in Rule 144A securities may have the effect
of increasing the amount of the Series' assets invested in illiquid assets.
See "Investment Methods and Risk Factors" - "Restricted Securities."
Series C may invest only in U.S. dollar denominated money market
instruments that present minimal credit risk and, with respect to 95% of its
total assets, measured at the time of investment, that are of the highest
quality. The Investment Manager will determine whether a security presents
minimal credit risk under procedures adopted by the Fund's Board of Directors.
A security will be considered to be highest quality (1) if rated in the highest
rating category, (e.g., Aaa or Prime-1 by Moody's or AAA or A-1 by Standard &
Poor's) by (i) any two nationally recognized statistical rating organizations
("NRSRO's") or, (ii) if rated by only one NRSRO, by that NRSRO; (2) if issued
by an issuer that has short-term debt obligations of comparable maturity,
priority, and security and that are rated in the highest rating category by (i)
any two NRSRO's or, (ii) if rated by only one NRSRO, by that NRSRO; or (3) an
unrated security that is of comparable quality to a security in the highest
rating category as determined by the Investment Manager and whose acquisition
is approved or ratified by the Board of Directors. With respect to 5% of its
total assets, measured at the time of investment, the Series may also invest in
money market instruments that are in the second-highest rating category for
short-term debt obligations (e.g., rated Aa or Prime-2 by Moody's or AA or A-2
by S&P). A money market instrument will be considered to be in the
second-highest rating category under the criteria described above with respect
to instruments considered highest quality, as applied to instruments in the
second-highest rating category.
Series C may not invest more than 5% of its total assets, measured at the
time of investment, in the securities of any one issuer that are of the highest
quality or more than the greater of 1% of its total assets or $1,000,000,
measured at the time of investment, in securities of any one issuer that are in
the second-highest rating category, except that these limitations shall not
apply to U.S. Government securities. The Series may exceed the 5% limitation
for up to three business days after the purchase of the securities of any one
issuer that are of the highest quality, provided that the Series has no more
than one such investment outstanding at any time. In the event that an
instrument acquired by the Series is downgraded, the Investment Manager, under
procedures approved by the Board of Directors, (or the Board of Directors
itself if the Investment Manager becomes aware that a security has been
downgraded below the second-highest rating category and the Investment Manager
does not dispose of the security within five business days) shall promptly
reassess whether such security presents minimal credit risk and determine
whether or not to retain the instrument. In the event that an instrument is
acquired by the Series that ceases to be eligible for the Series, the
Investment Manager will promptly dispose of such security in an orderly manner,
unless the Board of Directors determines that this would not be in the best
interests of the Series.
While Series C does not intend to engage in short-term trading, portfolio
securities may be sold without regard to the length of time that they have been
held. A portfolio security could be sold prior to maturity to take advantage

4
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SERIES C (CONTINUED)

of new investment opportunities or yield differentials, or to preserve gains or
limit losses due to changed economic conditions or the financial condition of
the issuer, or for other reasons.
Series C will invest in money market instruments of varying maturities
(but no longer than 13 months) in an effort to earn as high a level of current
income as is consistent with preservation of capital and liquidity. While
investing only in high quality money market instruments, investment in Series C
is not without risk. The market value of fixed income securities is generally
affected by changes in the level of interest rates. An increase in interest
rates will generally reduce the market value of fixed income investments, and a
decline in interest rates will generally increase their value. Instruments
with longer maturities are subject to greater fluctuations in value from
general interest rate changes than are shorter term issues. Such market value
changes could cause changes in the net asset value per share. (See
"Determination of Net Asset Value," page .) To reduce the effect of fluctuating
interest rates on the net asset value of its shares, Series C intends to
maintain a weighted average maturity in its portfolio of not more than 90 days.
In addition to general market risks, Series C's investments in non-government
obligations are subject to the ability of the issuer to satisfy its
obligations. See the Appendix for a description of the principal types of
securities and instruments in which Series C will invest.

SERIES D (WORLDWIDE EQUITY SERIES)

The investment objective of Series D is to seek long-term growth of
capital primarily through investment in common stocks and equivalents of
companies domiciled in foreign countries and the United States. Series D will
seek to achieve its objective through investment in a diversified portfolio of
securities which will consist primarily of all types of common stocks, which
may include ADRs, and equivalents (the following constitute equivalents:
convertible debt securities, warrants and options). See "Investment Methods
and Risk Factors" - "American Depositary Receipts." Series D may also invest
in preferred stocks, bonds and other debt obligations, which include money
market instruments of foreign and domestic companies and U.S. Government and
foreign governments, governmental agencies and international organizations.
The Series may also invest in real estate investment trusts (REITs). For a
full description of the Series' investment objective and policies, see the
Prospectus.
Certain of the securities purchased by Series D may be restricted as to
disposition under the federal securities laws, provided that such restricted
securities are eligible for resale to qualified institutional investors
pursuant to Rule 144A under the Securities Act of 1933 and subject to the
Fund's policy that not more than 10% of total assets will be invested in
illiquid securities. The Investment Manager, under procedures adopted by the
Board of Directors, will determine whether securities eligible for resale under
Rule 144A are liquid or not. In making this determination, the Investment
Manager, under the supervision of the Board of Directors, will consider trading
markets for the specific security taking into account the unregistered nature
of a Rule 144A security. In addition, the Investment Manager may consider:
(1) the frequency of trades and quotes; (2) the number of dealers and potential
purchasers; (3) dealer undertakings to make a market; and (4) the nature of the
security and of the marketplace trades (e.g. the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer). The
liquidity of Rule 144A securities will be monitored and if as a result of
changed conditions it is determined that a Rule 144A security is no longer
liquid, Series D's holdings of illiquid securities will be reviewed to
determine what, if any, steps are required to assure that it does not invest
more than 10% of its assets in illiquid securities. Investing in Rule 144A
securities could have the effect of increasing the amount of the Series' assets
invested in illiquid securities, and there may be undesirable delays in selling
illiquid securities. See "Investment Methods and Risk Factors" - "Restricted
Securities."
In seeking to achieve its investment objective, Series D may from time to
time engage in the following investment practices:
TRANSACTION HEDGING. When Series D enters into contracts for purchase or
sale of a portfolio security denominated in a foreign currency, it may be
required to settle a purchase transaction in the relevant foreign currency or
receive the proceeds of a sale in that currency. In either event, Series D
will be obligated to acquire or dispose of such foreign currency as is
represented by the transaction by selling or buying an equivalent amount of
United States dollars. Furthermore, the Series may wish to "lock in" the
United States dollar value of the transaction at or near the time of a purchase
or sale of portfolio securities at the exchange rate or rates then prevailing
between the United States dollar and the currency in which the foreign security
is denominated.

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SERIES D (CONTINUED)

Therefore, Series D may, for a fixed amount of United States dollars, enter
into a forward foreign exchange contract for the purchase or sale of the amount
of foreign currency involved in the underlying securities transaction. In so
doing, Series D will attempt to insulate itself against possible losses and
gains resulting from a change in the relationship between the United States
dollar and the foreign currency during the period between the date a security
is purchased or sold and the date on which payment is made or received. This
process is known as "transaction hedging." To effect the translation of the
amount of foreign currencies involved in the purchase and sale of foreign
securities and to effect the "transaction hedging" described above, Series D
may purchase or sell foreign currencies on a "spot" (i.e. cash) basis or on a
forward basis whereby the Series purchases or sells a specific amount of
foreign currency, at a price set at the time of the contract, for receipt of
delivery at a specified date which may be any fixed number of days in the
future.
Such spot and forward foreign exchange transactions may also be utilized
to reduce the risk inherent in fluctuations in the exchange rate between the
United States dollar and the relevant foreign currency when foreign securities
are purchased or sold for settlement beyond customary settlement time (as
described below). Neither type of foreign currency transaction will eliminate
fluctuations in the prices of Series D's portfolio or securities or prevent
loss if the price of such securities should decline.
PORTFOLIO HEDGING. Some or all of Series D's portfolio will be
denominated in foreign currencies. As a result, in addition to the risk of
change in the market value of portfolio securities, the value of the portfolio
in United States dollars is subject to fluctuations in the exchange rate
between such foreign currencies and the United States dollar. When, in the
opinion of the Series' Sub-Adviser, Lexington Management Corporation
("Lexington"), it is desirable to limit or reduce exposure in a foreign
currency in order to moderate potential changes in the United States dollar
value of the portfolio, Series D may enter into a forward foreign currency
exchange contract by which the United States dollar value of the underlying
foreign portfolio securities can be approximately matched by an equivalent
United States dollar liability. This technique is known as "portfolio hedging"
and moderates or reduces the risk of change in the United States dollar value
of the Series' portfolio only during the period before the maturity of the
forward contract (which will not be in excess of one year). Series D, for
hedging purposes only, may also enter into forward currency exchange contracts
to increase its exposure to a foreign currency that Lexington expects to
increase in value relative to the United States dollar. Series D will not
attempt to hedge all of its foreign portfolio positions and will enter into
such transactions only to the extent, if any, deemed appropriate by Lexington.
Hedging against a decline in the value of currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Series D intends to limit transactions as
described in this paragraph to not more than 70% of total Series assets.
FORWARD COMMITMENTS. Series D may make contracts to purchase securities
for a fixed price at a future date beyond customary settlement time ("forward
commitments") because new issues of securities are typically offered to
investors, such as Series D, on that basis. Forward commitments involve a risk
of loss if the value of the security to be purchased declines prior to the
settlement date. This risk is in addition to the risk of decline in value of
Series D's other assets. Although the Series will enter into such contracts
with the intention of acquiring the securities, Series D may dispose of a
commitment prior to settlement if Lexington deems it appropriate to do so.
Series D may realize short-term profits or losses upon the sale of forward
commitments.
COVERED CALL OPTIONS. Call options may also be used as a means of
participating in an anticipated price increase of a security on a more limited
basis than would be possible if the security itself were purchased. Series D
may write only covered call options. Since it can be expected that a call
option will be exercised if the market value of the underlying security
increases to a level greater than the exercise price, this strategy will
generally be used when Lexington believes that the call premium received by the
Series, plus anticipated appreciation in the price of the underlying security,
up to the exercise price of the call, will be greater than the appreciation in
the price of the security. Series D will not purchase put and call options
written by others. Also, Series D will not write any put options. Series D
intends to limit transactions as described in this paragraph to less than 5% of
total Series assets. See the discussion of writing covered call options under
"Investment Methods and Risk Factors."

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<PAGE>

SERIES E (HIGH GRADE INCOME SERIES)

The investment objective of Series E is to provide current income with
security of principal. In pursuing its investment objective, the Series will
invest in a broad range of debt securities, including (i) securities issued by
U.S. and Canadian corporations; (ii) securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (iii) securities issued or
guaranteed by the Dominion of Canada or provinces thereof; (iv) securities
issued by foreign governments, their agencies and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars; (v)
higher yielding, high risk debt securities (commonly referred to as "junk
bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign bank
("Yankee CDs"); and (vii) investment grade mortgage-backed securities ("MBSs")
and (viii) zero coupon securities. Under normal circumstances, the Series will
invest at least 65% of its assets in U.S. Government securities and securities
rated A or higher by Moody's or S&P at the time of purchase, or if unrated, of
equivalent quality as determined by the Investment Manager.
Series E may invest in corporate debt securities rated Baa or higher by
Moody's or BBB or higher by S&P at the time of purchase, or if unrated, of
equivalent quality as determined by the Investment Manager. See Appendix A for
a description of corporate bond ratings. Included in such securities may be
convertible bonds or bonds with warrants attached which are rated at least Baa
or BBB at the time of purchase, or if unrated, of equivalent quality as
determined by the Investment Manager. A "convertible bond" is a bond,
debenture or preferred share which may be exchanged by the owner for common
stock or another security, usually of the same company, in accordance with the
terms of the issue. A "warrant" confers upon its holder the right to purchase
an amount of securities at a particular time and price. Securities rated Baa
by Moody's or BBB by S&P have speculative characteristics.
Series E may invest up to 25% of its net assets in higher yielding debt
securities in the lower rating (higher risk) categories of the recognized
rating services (commonly referred to as "junk bonds"). Such securities
include securities rated Ba or lower by Moody's or BB or lower by S&P and are
regarded as predominantly speculative with respect to the ability of the issuer
to meet principal and interest payments. The Series will not invest in junk
bonds which are rated in default at the time of purchase. See "Investment
Methods and Risk Factors" for a discussion of the risks associated with
investing in such securities.
U.S. Government securities are obligations of or guaranteed by the U.S.
Government, its agencies or instrumentalities. These include bills,
certificates of indebtedness, notes and bonds issued by the Treasury or by
agencies in instrumentalities of the U.S. Government. Some U.S. Government
securities, such as Treasury bills and bonds, 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 Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. Although U.S. Government securities are
guaranteed by the U.S. Government, its agencies or instrumentalities, shares of
the Fund are not so guaranteed in any way. The diversification rules under
Section 817(h) of the Internal Revenue Code limit the ability of Series E to
invest more than 55% of its assets in the securities of any one U.S. Government
agency or instrumentality.
Series E may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof, and Canadian corporate debt
securities. Canadian securities would not be purchased if subject to the
foreign interest equalization tax and unless payable in U.S. dollars.
For fixed-income securities such as corporate debt securities or U.S.
Government securities, the market value is generally affected by changes in the
level of interest rates. An increase in interest rates will tend to reduce the
market value of fixed-income investments, and a decline in interest rates will
tend to increase their value. In addition, debt securities with longer
maturities, which tend to produce higher yields, are subject to potentially
greater capital appreciation and depreciation than obligations with shorter
maturities.
Series E may invest in Yankee CDs which are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
U.S. Yankee CDs are subject to somewhat different risks than are the
obligations of domestic banks. The Series also may invest in debt securities
issued by foreign governments, their agencies and instrumentalities and foreign
corporations, provided that such securities are denominated in U.S. dollars.
The Series' investments in foreign securities, including Canadian securities,
will not exceed 25% of the

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SERIES E (CONTINUED)

Series' net assets. See "Investment Methods and Risk Factors" for a discussion
of the risks associated with investing in foreign securities.
Series E may invest in investment grade mortgage-backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Series may invest up to 10% of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
or "interest-only" (IO) or "principal-only" (PO) bonds, the market values of
which generally will be more volatile than the market values of most MBSs. The
Series will hold less than 25% of its net assets in MBSs. For a discussion of
MBSs and the risks associated with such securities, see "Investment Methods and
Risk Factors."
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also are sold at substantial discounts
but provide for the commencement of regular interest payments at a deferred
date. See "Investment Methods and Risk Factors" for a discussion of zero coupon
securities.
Series E may acquire certain securities that are restricted as to
disposition under the federal securities laws, including securities that are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933, subject to the Series' policy that not more
than 15 percent of the Series' net assets will be invested in illiquid assets.
See "Investment Methods and Risk Factors" for a discussion of restricted
securities.
Series E may purchase securities on a "when-issued" or "delayed delivery
basis" in excess of customary settlement periods for the types of security
involved. For a discussion of such securities, see "Investment Methods and
Risk Factors" - "When-Issued Securities."
Series E may, for defensive purposes, invest part or all of its assets in
money market instruments such as those appropriate for investment by Series C.

SERIES J (EMERGING GROWTH SERIES)

The investment objective of Series J is to seek capital appreciation by
investing in a diversified portfolio of common stocks (which may include ADRs),
preferred stocks, debt securities, and securities convertible into common
stocks. See "Investment Methods and Risk Factors" - "American Depositary
Receipts." On a temporary basis, there may be times when Series J may invest
its assets in cash or money market instruments for defensive purposes.
Securities selected for their appreciation possibilities will be primarily
common stocks or other securities having the investment characteristics of
common stocks, such as securities convertible into common stocks. Securities
will be selected on the basis of their appreciation and growth potential.
Current income will not be a factor in selecting investments, and any such
income should be considered incidental. Securities considered to have capital
appreciation and growth potential will often include securities of smaller and
less mature companies. These companies often have a unique proprietary product
or profitable market niche and the potential to grow very rapidly. Such
companies may present greater opportunities for capital appreciation because of
high potential earnings growth, but may also involve greater risk. They may
have limited product lines, markets or financial resources, and they may be
dependent on a small or inexperienced management team. Their securities may
trade less frequently and in limited volume, and only in the over-the-counter
market or on smaller securities exchanges. As a result, the securities of
smaller companies may have limited marketability and may be subject to more
abrupt or erratic changes in value than securities of larger, more established
companies.
Series J may also invest in larger companies where opportunities for
above-average capital appreciation appear favorable.
Series J may purchase securities on a "when-issued" or "delayed delivery
basis" in excess of customary settlement periods for the type of security
involved. Securities purchased on a when-issued basis are subject to market
fluctuation and no interest or dividends accrue to the Series prior to the
settlement date. Series J will establish a segregated account with its
custodian bank in which it will maintain cash or liquid securities equal in
value to commitments for such when-issued or delayed delivery securities. See
"Investment Methods and Risk Factors" - "When-Issued Securities."
The Series may enter into futures contracts (or options thereon) to hedge
all or a portion of its portfolio, or as an efficient means of adjusting its
exposure to the stock market. The Series will not use futures contracts for
leveraging purposes. The Series will limit its use of futures contracts so
that initial margin deposits or premiums

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SERIES J (CONTINED)

on such contracts used for non-hedging purposes will not equal more than 5% of
the Series' net asset value. Futures contracts (and options thereon) and the
risks associated with such instruments are described in further detail under
"Investment Methods and Risk Factors."
In seeking capital appreciation, Series J may, during certain periods,
trade to a substantial degree in securities for the short term. That is, the
Series may be engaged essentially in trading operations based on short-term
market considerations, as distinct from long-term investments based on
fundamental evaluations of securities. This investment policy is speculative
and involves substantial risk.

SERIES K (GLOBAL AGGRESSIVE BOND SERIES)

The primary investment objective of Series K is to provide high current
income. Capital appreciation is a secondary objective. The Series, under
normal circumstances, invests substantially all of its assets in debt
securities of issuers in the United States, developed foreign countries and
emerging markets. For purposes of its investment objective, the Series
considers an emerging country to be any country whose economy and market the
World Bank or United Nations considers to be emerging or developing. The
Series may also invest in debt securities traded in any market, of companies
that derive 50% or more of their total revenue from either goods or services
produced in such emerging countries and emerging markets or sales made in such
countries. Determinations as to eligibility will be made by the Series'
Sub-Advisers, Lexington and MFR Advisors, Inc. ("MFR") based on publicly
available information and inquiries made to the companies. It is possible in
the future that sufficient numbers of emerging country or emerging market debt
securities would be traded on securities markets in industrialized countries so
that a major portion, if not all, of the Series' assets would be invested in
securities traded on such markets, although such a situation is unlikely at
present.
Currently, investing in many of the emerging countries and emerging
markets is not feasible or may involve political risks. Accordingly, Lexington
currently intends to consider investments only in those countries in which it
believes investing is feasible. The list of acceptable countries will be
reviewed by Lexington and MFR and approved by the Board of Directors on a
periodic basis and any additions or deletions with respect to such list will be
made in accordance with changing economic and political circumstances involving
such countries. Lexington is the Sub-Adviser of the Series. Lexington has
entered into a sub-advisory contract with MFR to provide Series K with
investment and economic research services. In determining the appropriate
distribution of investments among various countries and geographic regions for
the Series, Lexington and MFR ordinarily consider the following factors:
prospects for relative economic growth among the different countries in which
the Series may invest; expected levels of inflation; government policies
influencing business conditions; the outlook for currency relationships; and
the range of the individual investment opportunities available to international
investors.
Although the Series values assets daily in terms of U.S. dollars, the
Series does not intend to convert holdings of foreign currencies into U.S.
dollars on a daily basis. The Series will do so from time to time, and
investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference ("spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Series at one rate, while offering a lesser rate of
exchange should the Series desire to sell that currency to the dealer.
The Series may invest in the following types of money market instruments
(i.e., debt instruments with less than 12 months remaining until maturity)
denominated in U.S. dollars or other currencies: (a) obligations issued or
guaranteed by the U.S. or foreign governments, their agencies,
instrumentalities or municipalities; (b) obligations of international
organizations designed or supported by multiple foreign governmental entities
to promote economic reconstruction or development; (c) finance company
obligations, corporate commercial paper and other short-term commercial
obligations; (d) bank obligations (including certificates of deposit, time
deposits, demand deposits and bankers' acceptances), subject to the restriction
that the Series may not invest more than 25% of its total assets in bank
securities; (e) repurchase agreements with respect to the foregoing; and (f)
other substantially similar short-term debt securities with comparable
characteristics.
SAMURAI AND YANKEE BONDS. Subject to its respective fundamental
investment restrictions, the Series may invest in yen-denominated bonds sold in
Japan by non-Japanese issuers ("Samurai bonds"), and may invest in
dollar-denominated bonds sold in the United States by non-U.S. issuers ("Yankee
bonds"). It is the policy of the

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SERIES K (CONTINUED)

Series to invest in Samurai or Yankee bond issues only after taking into
account considerations of quality and liquidity, as well as yield.
COMMERCIAL BANK OBLIGATIONS. For the purposes of the Series' investment
policies with respect to bank obligations, obligations of foreign branches of
U.S. banks and of foreign banks are obligations of the issuing bank and may be
general obligations of the parent bank. Such obligations, however, may be
limited by the terms of a specific obligation and by government regulation. As
with investment in non-U.S. securities in general, investments in the
obligations of foreign branches of U.S. banks and of foreign banks may subject
the Series to investment risks that are different in some respect from those of
investments in obligations of domestic issuers. Although the Series typically
will acquire obligations issued and supported by the credit of U.S. or foreign
banks having total assets at the time of purchase in excess of $1 billion, this
$1 billion figure is not a fundamental investment policy or restriction of the
Series. For the purposes of calculation with respect to the $1 billion figure,
the assets of a bank will be deemed to include the assets of its U.S. and
non-U.S. branches.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL
TRANSACTIONS. Although repurchase agreements carry certain risks not
associated with direct investments in securities, the Series intends to enter
into repurchase agreements only with banks and broker/dealers believed by
Lexington and MFR to present minimal credit risks in accordance with guidelines
approved by the Fund's Board of Directors. Lexington and MFR will review and
monitor the creditworthiness of such institutions, and will consider the
capitalization of the institution, Lexington and MFR's prior dealings with the
institution, any rating of the institution's senior long-term debt by
independent rating agencies and other relevant factors.
The Series will invest only in repurchase agreements collateralized at all
times in an amount at least equal to the repurchase price plus accrued
interest. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase were less than the repurchase
price, the Series would suffer a loss. If the financial institution which is
party to the repurchase agreement petitions for bankruptcy or otherwise becomes
subject to bankruptcy or other liquidation proceedings there may be
restrictions on the Series' ability to sell the collateral and the Series could
suffer a loss. The Series will not enter into a repurchase agreement with a
maturity of more than seven days if, as a result, more than 15% of the value of
its total net assets would be invested in such repurchase agreements and other
illiquid investments and securities for which no readily available market
exists.
The Series may enter into reverse repurchase agreements. A reverse
repurchase agreement is a borrowing transaction in which the Series transfers
possession of a security to another party, such as a bank or broker/dealer, in
return for cash, and agrees to repurchase the security in the future at an
agreed upon price, which includes an interest component. The Series also may
engage in "roll" borrowing transactions which involve the Series' sale of fixed
income securities together with a commitment (for which the Series may receive
a fee) to purchase similar, but not identical, securities at a future date.
The Series will maintain, in a segregated account with a custodian, cash or
liquid securities in an amount sufficient to cover its obligation under "roll"
transactions and reverse repurchase agreements.
BORROWING. The Series' operating policy on borrowing provides that the
Series will not borrow money in order to purchase securities and the Series may
borrow up to 5% of its total assets for temporary or emergency purposes and to
meet redemptions. This policy may be changed by the Fund's Board of Directors.
Any borrowing by the Series may cause greater fluctuation in the value of its
shares than would be the case if the Series did not borrow.
SHORT SALES. The Series is authorized to make short sales of securities,
although it has no current intention of doing so. A short sale is a
transaction in which the Series sells a security in anticipation that the
market price of that security will decline. The Series may make short sales as
a form of hedging to offset potential declines in long positions in securities
it owns and in order to maintain portfolio flexibility. The Series only may
make short sales "against the box." In this type of short sale, at the time of
the sale, the Series owns the security it has sold short or has the immediate
and unconditional right to acquire the identical security at no additional
cost.
In a short sale, the seller does not immediately deliver the securities
sold and does not receive the proceeds from the sale. To make delivery to the
purchaser, the executing broker borrows the securities being sold short on
behalf of the seller. The seller is said to have a short position in the
securities sold until it delivers the securities sold, at which time it
receives the proceeds of the sale. To secure its obligation to deliver
securities sold short, the

10
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SERIES K (CONTINUED)

Series will deposit in a separate account with its custodian an equal amount
of the securities sold short or securities convertible into or exchangeable for
such securities at no cost. The Series could close out a short position by
purchasing and delivering an equal amount of the securities sold short, rather
than by delivering securities already held by the Series, because the Series
might want to continue to receive interest and dividend payments on securities
in its portfolio that are convertible into the securities sold short.
The Series might make a short sale "against the box" in order to hedge
against market risks when Lexington and MFR believe that the price of a
security may decline, causing a decline in the value of a security owned by the
Series or a security convertible into or exchangeable for such security. In
such case, any future losses in the Series' long position should be reduced by
a gain in the short position. Conversely, any gain in the long position should
be reduced by a loss in the short position. The extent to which such gains or
losses in the long position are reduced will depend upon the amount of the
securities sold short relative to the amount of the securities the Series owns,
either directly or indirectly, and, in the case where a Series owns convertible
securities, changes in the investment values or conversion premiums of such
securities. There will be certain additional transaction costs associated with
short sales "against the box," but the Series will endeavor to offset these
costs with income from the investment of the cash proceeds of short sales.
ILLIQUID SECURITIES. The Series may invest up to 15% of total net assets
in illiquid securities. Securities may be considered illiquid if the Series
cannot reasonably expect to receive approximately the amount at which the
Series values such securities within seven days. The sale of illiquid
securities, if they can be sold at all, generally will require more time and
result in higher brokerage charges or dealer discounts and other selling
expenses than will the sale of liquid securities, such as securities eligible
for trading on U.S. securities exchanges or in the over-the-counter markets.
Moreover, restricted securities, which may be illiquid for purposes of this
limitation often sell, if at all, at a price lower than similar securities that
are not subject to restrictions on resale.
With respect to liquidity determinations generally, the Fund's Board of
Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
Securities Act of 1933, are liquid or illiquid. The Board has delegated the
function of making day-to-day determinations of liquidity to Lexington and MFR
in accordance with procedures approved by the Fund's Board of Directors.
Lexington and MFR take into account a number of factors in reaching liquidity
decisions, including, but not limited to: (i) the frequency of trading in the
security; (ii) the number of dealers that make quotes for the security; (iii)
the number of dealers that have undertaken to make a market in the security;
(iv) the number of other potential purchasers; and (v) the nature of the
security and how trading is effected (e.g., the time needed to sell the
security, how offers are solicited and the mechanics of transfer). Lexington
and MFR will monitor the liquidity of securities held by the Series and report
periodically on such decisions to the Board of Directors.

OPTIONS, FUTURES AND FORWARD CURRENCY STRATEGIES

WRITING COVERED CALL OPTIONS. The Series may write (sell) covered call
options and purchase options to close out options previously written by the
Series. Covered call options generally will be written on securities and
currencies which in the opinion of Lexington and MFR are not expected to make
any major price moves in the near future but which, over the long term, are
deemed to be attractive investments for the Series. Lexington, MFR and the
Series believe that writing of covered call options is less risky than writing
uncovered or "naked" options, which the Series will not do. For more
information about writing covered call options, see the discussion under
"Investment Methods and Risk Factors."
WRITING COVERED PUT OPTIONS. The Series may write covered put options and
purchase options to close out options previously written by the Series. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) the obligation to buy, the underlying security or currency at the
exercise price during the option period. The option may be exercised at any
time prior to its expiration date. The operation of put options in other
respects, including their related risks and rewards, is substantially identical
to that of call options. See the discussion of writing covered put options
under "Investment Methods and Risk Factors."
PURCHASING PUT OPTIONS. The Series may purchase put options. As the
holder of a put option, the Series would have the right to sell the underlying
security or currency at the exercise price at any time during the option
period. The Series may enter into closing sale transactions with respect to
such options, exercise them or permit them to expire. See the discussion of
purchases of put options under "Investment Methods and Risk Factors."

11
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SERIES K (CONTINUED)

The premium paid by the Series when purchasing a put option will be
recorded as an asset in the Series' statement of assets and liabilities. This
asset will be adjusted daily to the option's current market value, which will
be the latest sale price at the time at which the net asset value per share of
the Series is computed (at the close of regular trading on the NYSE), or, in
the absence of such sale, the latest bid price. The asset will be extinguished
upon expiration of the option, the writing of an identical option in a closing
transaction, or the delivery of the underlying security or currency upon the
exercise of the option.
PURCHASING CALL OPTIONS. The Series may purchase call options. As the
holder of a call option, the Series would have the right to purchase the
underlying security or currency at the exercise price at any time during the
option period. The Series may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. Call options
may be purchased by the Series for the purpose of acquiring the underlying
security or currency for its portfolio. For a discussion of purchases of call
options, see "Investment Methods and Risk Factors."
The Series may attempt to accomplish objectives similar to those involved
in using Forward Contracts (defined below), as described in the Prospectus, by
purchasing put or call options on currencies. A put option gives the Series as
purchaser the right (but not the obligation) to sell a specified amount of
currency at the exercise price until the expiration of the option. A call
option gives the Series as purchaser the right (but not the obligation) to
purchase a specified amount of currency at the exercise price until its
expiration. The Series might purchase a currency put option, for example, to
protect itself during the contract period against a decline in the dollar value
of a currency in which it holds or anticipates holding securities. If the
currency's value should decline against the dollar, the loss in currency value
should be offset, in whole or in part, by an increase in the value of the put.
If the value of the currency instead should rise against the dollar, any gain
to the Series would be reduced by the premium it had paid for the put option.
A currency call option might be purchased, for example, in anticipation of, or
to protect against, a rise in the value against the dollar of a currency in
which the Series anticipates purchasing securities.
Currency options may be either listed on an exchange or traded
over-the-counter ("OTC options"). Listed options are third-party contracts
(i.e., performance of the obligations of the purchaser and seller is guaranteed
by the exchange or clearing corporation), and have standardized strike prices
and expiration dates. OTC options are two-party contracts with negotiated
strike prices and expiration dates. The Securities and Exchange Commission
("SEC") staff considers OTC options to be illiquid securities. The Series will
not purchase an OTC option unless the Series believes that daily valuations for
such options are readily obtainable. OTC options differ from exchange-traded
options in that OTC options are transacted with dealers directly and not
through a clearing corporation (which guarantees performance). Consequently,
there is a risk of non-performance by the dealer. Since no exchange is
involved, OTC options are valued on the basis of a quote provided by the
dealer. In the case of OTC options, there can be no assurance that a liquid
secondary market will exist for any particular option at any specific time.
INTEREST RATE AND CURRENCY FUTURES CONTRACTS. The Series may enter into
interest rate or currency futures contracts ("Futures" or "Futures Contracts")
as a hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Series. The
Series' hedging may include sales of Futures as an offset against the effect of
expected increases in interest rates or currency exchange rates, and purchases
of Futures as an offset against the effect of expected declines in interest
rates or currency exchange rates.
The Series will enter only into Futures Contracts which are traded on
national futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal interest rate and currency
Futures exchanges in the United States are the Board of Trade of the City of
Chicago and the Chicago Mercantile Exchange. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"). Futures are exchanged in London at the London
International Financial Futures Exchange.
Although techniques other than sales and purchases of Futures Contracts
could be used to reduce the Series' exposure to interest rate and currency
exchange rate fluctuations, the Series may be able to hedge exposure more
effectively and at a lower cost through using Futures Contracts.

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SERIES K (CONTINUED)

The Series will not enter into a Futures Contract if, as a result thereof,
more than 5% of the Series' total assets (taken at market value at the time of
entering into the contract) would be committed to "margin" (down payment)
deposits on such Futures Contracts.
Futures Contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (debt
security or currency) for a specified price at a designated date, time and
place. Brokerage fees are incurred when a Futures Contract is bought or sold,
and margin deposits must be maintained at all times the Futures Contract is
outstanding. For a discussion of Futures Contracts and the risks associated
with investing in Futures Contracts, see "Investment Methods and Risk Factors."
In the case of a Futures Contract sale, the Series either will set aside
amounts, as in the case of a Futures Contract purchase, own the security
underlying the contract or hold a call option permitting the Series to purchase
the same Futures Contract at a price no higher than the contract price. Assets
used as cover cannot be sold while the position in the corresponding Futures
Contract is open, unless they are replaced with similar assets. As a result,
the commitment of a significant portion of the Series' assets to cover could
impede portfolio management or the Series' ability to meet redemption requests
or other current obligations.
OPTIONS ON FUTURES CONTRACTS. Options on Futures Contracts are similar to
options on securities or currencies except that options on Futures Contracts
give the purchaser the right, in return for the premium paid, to assume a
position in a Futures Contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell the
Futures Contract, at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the Futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's Futures
margin account which represents the amount by which the market price of the
Futures Contract, at exercise, exceeds (in the case of a call) or is less than
(in the case of a put) the exercise price of the option on the Futures
Contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the
closing level of the securities, currencies or index upon which the Futures
Contracts are based on the expiration date. Purchasers of options who fail to
exercise their options prior to the exercise date suffer a loss of the premium
paid.
As an alternative to purchasing call and put options on Futures, the
Series may purchase call and put options on the underlying securities or
currencies themselves. Such options would be used in a manner identical to the
use of options on Futures Contracts.
To reduce or eliminate the leverage then employed by the Series, or to
reduce or eliminate the hedge position then currently held by the Series, the
Series may seek to close out an option position by selling an option covering
the same securities or contract and having the same exercise price and
expiration date. Trading in options on Futures Contracts began relatively
recently. The ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid secondary
market. It is not certain that this market will develop. For a discussion of
options on Futures Contracts and associated risks, see "Investment Methods and
Risk Factors."
FORWARD CURRENCY CONTRACTS AND OPTIONS ON CURRENCY. A forward currency
contract ("Forward Contract") is an obligation, generally arranged with a
commercial bank or other currency dealer, to purchase or sell a currency
against another currency at a future date and price as agreed upon by the
parties. The Series may accept or make delivery of the currency at the
maturity of the Forward Contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. The
Series may enter into Forward Contracts either with respect to specific
transactions or with respect to the Series' portfolio positions. The Series
will utilize Forward Contracts only on a covered basis. See the discussion of
such contracts and related options under "Investment Methods and Risk Factors."
INTEREST RATE AND CURRENCY SWAPS. The Series usually will enter into
interest rate swaps on a net basis if the contract so provides, that is, the
two payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Series receiving or paying, as the
case may be, only the net amount of the two payments. Inasmuch as swaps, caps,
floors and collars are entered into for good faith hedging purposes, Lexington,
MFR and the Series believe that they do not constitute senior securities under
the 1940 Act if appropriately covered and, thus, will not treat them as being
subject to the Series' borrowing restrictions. Interest rate swaps involve the
exchange by the Series with another party of their respective commitments to
pay or

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SERIES K (CONTINUED)

receive interest (for example, an exchange of floating rate payments for
fixed rate payments) with respect to a notional amount of principal. A
currency swap is an agreement to exchange cash flows on a notional amount based
on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling the cap to the extent that a specified index exceeds a
predetermined interest rate. The purchase of an interest rate floor entitles
the purchaser to receive payments on a notional principal amount from the party
selling the floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and
a floor that preserves a certain return within a predetermined range of
interest rates or values.
The Series will not enter into any swap, cap, floor, collar or other
derivative transaction unless, at the time of entering into the transaction,
the unsecured long-term debt rating of the counterparty combined with any
credit enhancements is rated at least A by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P") or has an equivalent
rating from a nationally recognized statistical rating organization or is
determined to be of equivalent credit quality by Lexington and MFR. If a
counterparty defaults, the Series may have contractual remedies pursuant to the
agreements related to the transactions. The swap market has grown
substantially in recent years, with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, for that reason, they are
less liquid than swaps.

SERIES M (SPECIALIZED ASSET ALLOCATION SERIES)

The investment objective of Series M is to seek high total return,
consisting of capital appreciation and current income. The Series seeks this
objective by following an asset allocation strategy that contemplates shifts
among a wide range of investment categories and market sectors. The Series
will invest in the following investment categories: equity securities of
domestic and foreign issuers, including common stocks, preferred stocks,
convertible securities and warrants; debt securities of domestic and foreign
issuers, including mortgage-related and other asset-backed securities;
exchange-traded real estate investment trusts (REITs); equity securities of
companies involved in the exploration, mining, development, production and
distribution of gold ("gold stocks"); zero coupon securities and domestic money
market instruments. See "Investment Methods and Risk Factors" in the
Prospectus and this Statement of Additional Information for a discussion of the
additional risks associated with investment in foreign securities, and see the
discussion of the risks associated with investment in gold stocks below.
Investment in gold stocks presents risks, because the prices of gold have
fluctuated substantially over short periods of time. Prices may be affected by
unpredictable monetary and political policies, such as currency devaluations or
revaluations, economic and social conditions within an individual country,
trade imbalances, or trade or currency restrictions between countries. The
unstable political and social conditions in South Africa and unsettled
political conditions prevailing in neighboring countries may have disruptive
effects on the market prices of securities of South African companies.
The Series is not required to maintain a portion of its assets in each of
the permitted investment categories. The Series, however, under normal
circumstances maintains a minimum of 35% of its total assets in equity
securities and 10% in debt securities. The Series will not invest more than
55% of its total assets in money market instruments (except when in a temporary
defensive position), more than 80% of its total assets in foreign securities,
nor more than 20% of its total assets in gold stocks.
The Series' Sub-Adviser, Meridian Investment Management Company
("Meridian"), conducts quantitative investment research and uses the research
to strategically allocate the Series' assets among the investment categories
identified above, primarily on the basis of a quantitative asset allocation
model. With respect to equity securities, the model analyzes a large number of
equity securities based on the following factors: current earnings, earnings
history, long-term earnings projections, current price, and price momentum.
Meridian then determines which sectors within an identified investment category
are deemed to be the most attractive relative to other sectors. For example,
the model may indicate that a portion of the Series' assets should be invested
in the domestic equity category of the market and within this category that
pharmaceutical stocks represent a sector with an attractive total return
potential.

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SERIES M (CONTINUED)

Meridian identifies sectors of the domestic and international economy in
which the Series will invest and then determines which equity securities to
purchase within the identified sectors.
With respect to the selection of debt securities for the Series, the asset
allocation model provided by Meridian, analyzes the prices of commodities and
finished goods to arrive at an interest rate projection. The Investment
Manager will determine the portion of the portfolio to allocate to debt
securities and the duration of those securities based on the model's interest
rate projections. Gold stocks and REITs will be analyzed in a manner similar
to that used for equity securities. Money market instruments will be analyzed
based on current returns and the current yield curve. The asset allocation
model used by the Series may evolve over time or be replaced by other stock
selection techniques. There is no assurance that the model will correctly
predict market trends or enable the Series to achieve its investment objective.
The debt securities in which the Series may invest will, at the time of
investment, consist of "investment grade" bonds, which are bonds rated BBB or
better by S&P or Baa or better by Moody's or that are unrated by S&P and
Moody's but considered by the Investment Manager to be of equivalent credit
quality. Securities rated BBB by S&P or Baa by Moody's have speculative
characteristics and may be more susceptible than higher grade bonds to adverse
economic conditions or other adverse circumstances which may result in a
weakened capacity to make principal and interest payments.
The Series may invest in investment grade mortgage-backed securities
(MBSs), including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Series will not invest in an MBS if, as a result of
such investment, more than 25% of its total assets would be invested in MBSs,
including CMOs and mortgage pass-through securities. For a discussion of MBSs
and the risks associated with such securities, see "Investment Methods and Risk
Factors" - "Mortgage-Backed Securities" in the Prospectus and this Statement of
Additional Information.
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also are sold at substantial discounts
but provide for the commencement of regular interest payments at a deferred
date. See "Investment Methods and Risk Factors" for a discussion of zero coupon
securities.
The Series may write covered call options and purchase put options on
securities, financial indices and foreign currencies and may enter into futures
contracts. The Series may buy and sell futures contracts (and options on such
contracts) to manage exposure to changes in securities prices and foreign
currencies and as an efficient means of adjusting overall exposure to certain
markets. It is the Series' operating policy that initial margin deposits and
premiums on options used for non-hedging purposes will not equal more than 5%
of the Series' net assets. The total market value of securities against which
the Series has written call options may not exceed 25% of its total assets.
The Series will not commit more than 5% of its total assets to premiums when
purchasing put options. Futures contracts and options may not always be
successful hedges and their prices can be highly volatile. Using futures
contracts and options could lower the Series' total return and the potential
loss from the use of futures can exceed the Series' initial investment in such
contracts. Futures contracts and options and the risks associated with such
instruments are described in further detail under "Investment Methods and Risk
Factors."

SERIES N (MANAGED ASSET ALLOCATION SERIES)

The investment objective of Series N is to seek a high level of total
return by investing primarily in a diversified group of fixed income and equity
securities.
The Series is designed to balance the potential appreciation of common
stocks with the income and principal stability of bonds over the long term.
Over the long term, the Series expects to allocate its assets so that
approximately 40% of such assets will be in the fixed income sector (as defined
below) and approximately 60% in the equity sector (as defined below). This mix
may vary over shorter time periods within the ranges set forth below:

Range
-----
Fixed Income Sector 30-50%
Equity Sector 50-70%

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SERIES N (CONTINUED)

The primary consideration in varying from the 60-40 allocation will be the
outlook of the Series' Sub-Adviser, T. Rowe Price Associates, Inc. ("T. Rowe
Price"), for the different markets in which the Series invests. Shifts between
the fixed income and equity sectors will normally be done gradually and T. Rowe
Price will not attempt to precisely "time" the market. There is, of course no
guarantee that T. Rowe Price's gradual approach to allocating the Series'
assets will be successful in achieving the Series' objective. The Series will
maintain cash reserves to facilitate the Series' cash flow needs (redemptions,
expenses and purchases of Series securities) and it may invest in cash reserves
without limitation for temporary defensive purposes.
Assets allocated to the fixed income portion of the Series primarily will
be invested in U.S. and foreign investment grade bonds, high yield bonds,
short-term investments and currencies, as needed to gain exposure to foreign
markets. Assets allocated to the equity portion of the Series will be
allocated among U.S. and non-dollar large- and small-cap companies, currencies
and futures.
The Series' fixed income sector will be allocated among investment grade,
high yield, U.S. and non-dollar debt securities and currencies generally within
the ranges indicated below:

Range
-----
Investment Grade 50-100%
High Yield 0-30%
Non-dollar 0-30%
Cash Reserves 0-20%

Investment grade debt securities include long, intermediate and short-term
investment grade debt securities (e.g., AAA, AA, A or BBB by S&P or if not
rated, of equivalent investment quality as determined by T. Rowe Price). The
weighted average maturity for this portion (investment grade debt securities)
of the Series' portfolio is generally expected to be intermediate (3-10 years),
although it may vary significantly. Non-dollar debt securities include
non-dollar denominated government and corporate debt securities or currencies
of at least three countries. See "Investment Methods and Risk Factors" -
"Certain Risks of Foreign Investing" for a discussion of the risks involved in
foreign investing. High-yield securities include high-yielding,
income-producing debt securities in the lower rating categories (commonly
referred to as "junk bonds") and preferred stocks including convertible
securities. High yield bonds may be purchased without regard to maturity;
however, the average maturity is expected to be approximately 10 years,
although it may vary if market conditions warrant. Quality will generally
range from lower-medium to low and the Series may also purchase bonds in
default if, in the opinion of T. Rowe Price, there is significant potential for
capital appreciation. Lower-rated debt obligations are generally considered to
be high risk investments. See "Investment Methods and Risk Factors" for a
discussion of the risks involved in investing in high-yield, lower-rated debt
securities. Securities which may be held as cash reserves include liquid
short-term investments of one year or less having the highest ratings by at
least one established rating organization, or if not rated, of equivalent
investment quality as determined by T. Rowe Price. The Series may use
currencies to gain exposure to an international market prior to investing in
non-dollar securities.
The Series' equity sector will be allocated among large and small capital
("Large Cap" and "Small Cap" respectively) U.S. and non-dollar equity
securities, currencies and futures, generally within the ranges indicated
below:

Large Cap 45-100%
Small Cap 0-30%
Non-dollar 0-35%

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SERIES N (CONTINUED)

(including developing countries) may be included. Under unusual circumstances,
however, investment may be substantially in one or two countries.
Futures may be used to gain exposure to equity markets where there is
insufficient cash to purchase a diversified portfolio of stocks. Currencies
may also be held to gain exposure to an international market prior to investing
in a non-dollar stock.
Small Cap securities include common stocks of small companies or companies
which offer the possibility of accelerated earnings growth because of
rejuvenated management, new products or structural changes in the economy.
Current income is not a factor in the selection of these stocks. Higher risks
are often associated with small companies. These companies may have limited
product lines, markets and financial resources, or they may be dependent on a
small or inexperienced management group. In addition, their securities may
trade less frequently and in limited volume and move more abruptly than
securities of larger companies. However, securities of smaller companies may
offer greater potential for capital appreciation since they are often overlooked
or undervalued by investors.
Until the Series reaches approximately $30 million in assets, the
composition of the Series' portfolio may vary significantly from the percent
limitations and ranges above. This might occur because, at lower asset levels,
the Series may be unable to prudently achieve diversification among the
described asset classes. During this initial period, the Series may use
futures contracts and purchase foreign currencies to a greater extent than it
will once the start-up period is over.
The Series may invest up to 35% of its total assets in U.S.
dollar-denominated and non-U.S. dollar-denominated securities issued by foreign
issuers. Some of the countries in which the Series may invest may be
considered to be developing and may involve special risks. For a discussion of
the risks involved in investment in foreign securities, see "Investment Methods
and Risk Factors" - "Certain Risks of Foreign Investing."
The Series' foreign investments are also subject to currency risk
described under "Investment Methods and Risk Factors" - "Currency
Fluctuations." To manage this risk and facilitate the purchase and sale of
foreign securities, the Series may engage in foreign currency transactions
involving the purchase and sale of forward foreign currency exchange contracts.
Although forward currency transactions will be used primarily to protect the
Series from adverse currency movements, they also involve the risk that
anticipated currency movements will not be accurately predicted and the Series'
total return could be adversely affected as a result. For a discussion of
forward currency transactions and the risks associated with such transactions,
see "Investment Methods and Risk Factors" - "Forward Currency Contracts and
Related Options" and "Purchase and Sale of Currency Futures Contracts and
Related Options." Purchases by the Series of currencies in substitution of
purchases of stocks and bonds will subject the Series to risks different from a
fund invested solely in stocks and bonds.
The Series' investments include, but are not limited to, equity and fixed
income securities of any type and the Series may utilize the investment methods
and investment vehicles described below.
The Series may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or currency exchange rates, or
as an efficient means of adjusting its exposure to the bond, stock, and
currency markets. The Series will not use futures contracts for leveraging
purposes. The Series will limit its use of futures contracts so that initial
margin deposits or premiums on such contracts used for non-hedging purposes
will not equal more than 5% of the Series' net asset value. The Series may
also write call and put options and purchase put and call options on
securities, financial indices, and currencies. The aggregate market value of
the Series' portfolio securities or currencies covering call or put options
will not exceed 25% of the Series' net assets. The Series may enter into
foreign futures and options transactions. As part of its investment program
and to maintain greater flexibility, the Series may invest in instruments which
have the characteristics of futures, options and securities, known as "hybrid
instruments." For a discussion of such instruments and the risks involved in
investing therein, see "Investment Methods and Risk Factors" -- "Hybrid
Instruments."
The Series may acquire illiquid securities in an amount not exceeding 15%
of net assets. Because an active trading market does not exist for such
securities the sale of such securities may be subject to delay and additional
costs. The Series will not invest more than 5% of its total assets in
restricted securities (other than securities eligible for resale under Rule
144A of the Securities Act of 1933). Series N may invest in securities on a
"when-

17
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SERIES N (CONTINUED)

issued" or "delayed delivery basis" in excess of customary settlement
periods for the type of security involved. For a discussion of restricted and
when-issued securities, see "Investment Methods and Risk Factors."
The Series may invest in asset-backed securities, which securities involve
certain risks. For a discussion of asset-backed securities and the risks
involved in investment in such securities, see the discussion under "Investment
Methods and Risk Factors." The Series may invest in mortgage-backed securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
or institutions such as banks, insurance companies and savings and loans. Some
of these securities, such as GNMA certificates, are backed by the full
faith and credit of the U.S. Treasury while others, such as Freddie Mac
certificates, are not. The Series may also invest in collateralized mortgage
obligations (CMOs) and stripped mortgage securities (a type of derivative).
Stripped mortgage securities are created by separating the interest and
principal payments generated by a pool of mortgage-backed bonds to create two
classes of securities, "interest only" (IO) and "principal only" (PO) bonds.
There are risks involved in mortgage-backed securities, CMOs and stripped
mortgage securities. See "Investment Methods and Risk Factors" for an
additional discussion of such securities and the risks involved therein.
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also are sold at substantial discounts
but provide for the commencement of regular interest payments at a deferred
date. See "Investment Methods and Risk Factors" for a discussion of zero coupon
securities.
While the Series will remain invested in primarily common stocks and
bonds, it may, for temporary defensive purposes, invest in cash reserves
without limitation. The Series may establish and maintain reserves as T. Rowe
Price believes is advisable to facilitate the Series' cash flow needs. Cash
reserves include money market instruments, including repurchase agreements, in
the two highest categories. Short-term securities may be held in the equity
sector as collateral for futures contracts. These securities are segregated
and may not be available for the Series' cash flow needs.
The Series may invest in debt or preferred equity securities convertible
into or exchangeable for equity securities and warrants. As a fundamental
policy, for the purpose of realizing additional income, the Series may lend
securities with a value of up to 33 1/3% of its total assets to broker-dealers,
institutional investors, or other persons. Any such loan will be continuously
secured by collateral at least equal to the value of the securities loaned.
For a discussion of the limitations on lending and risks of lending, see
"Investment Methods and Risk Factors" - "Lending of Portfolio Securities." The
Series may also invest in real estate investment trusts (REITs). For a
discussion of REITs and certain risks involved therein, see this Statement of
Additional Information and the Fund's Prospectus under "Investment Methods and
Risk Factors."
FIXED INCOME SECURITIES. Fixed income securities in which the Series may
invest include, but are not limited to, those described below.
U.S. GOVERNMENT OBLIGATIONS. Bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in the length of their maturities.
U.S. GOVERNMENT AGENCY SECURITIES. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Bank, Federal Land Banks,
Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these securities are
supported by the full faith and credit of the U.S. Treasury, and the remainder
are supported only by the credit of the instrumentality, which may or may not
include the right of the issuer to borrow from the Treasury.
BANK OBLIGATIONS. Certificates of deposit, bankers' acceptances, and
other short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposits may have fixed or variable
rates. The Series may invest in U.S. banks, foreign branches of U.S. banks,
U.S. branches of foreign banks and foreign branches of foreign banks.
SAVINGS AND LOAN OBLIGATIONS. Negotiable certificates of deposit and
other short-term debt obligations of savings and loan associations.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed

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SERIES N (CONTINUED)

through to the holders of the CMOs on the same schedule as they are received,
although certain classes of CMOs have priority over others with respect to the
receipt of prepayments on the mortgages. Therefore, depending on the type of
CMOs in which a Series invests, the investment may be subject to a greater or
lesser risk of prepayment than other types of mortgage-related securities.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities
representing interest in a pool of mortgages. After purchase by the Series, a
security may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Series. Neither event will require a sale of such
security by the Series. However, T. Rowe Price will consider such event in its
determination of whether the Series should continue to hold the security. To
the extent that the ratings given by Moody's or S&P may change as a result of
changes in such organizations or their rating systems, the Series will attempt
to use comparable ratings as standards for investments in accordance with the
investment policies contained in the Fund's Prospectus.
The Series may also invest in the securities of certain supranational
entities, such as the International Development Bank.
For a discussion of mortgage-backed securities and certain risks involved
therein, see this Statement of Additional Information and the Fund's Prospectus
under "Investment Methods and Risk Factors."
ASSET-BACKED SECURITIES. The Series may invest a portion of its assets in
debt obligations known as asset-backed securities. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity.
AUTOMOBILE RECEIVABLE SECURITIES. The Series may invest in asset-backed
securities which are backed by receivables from motor vehicle installment sales
contracts or installment loans secured by motor vehicles ("Automobile
Receivable Securities").
CREDIT CARD RECEIVABLE SECURITIES. The Series may invest in asset-backed
securities backed by receivables from revolving credit card agreements ("Credit
Card Receivable Securities").
OTHER ASSETS. T. Rowe Price anticipates that asset-backed securities
backed by assets other than those described above will be issued in the future.
The Series may invest in such securities in the future if such investment is
otherwise consistent with its investment objective and policies. For a
discussion of these securities, see this Statement of Additional Information
and the Fund's Prospectus under "Investment Methods and Risk Factors."
In addition to the investments described in the Fund's Prospectus, the
Series may invest in the following:
ADDITIONAL FUTURES AND OPTIONS CONTRACTS. Although the Series has no
current intention of engaging in financial futures or options transactions
other than those described above, it reserves the right to do so. Such futures
or options trading might involve risks which differ from those involved in the
futures and options described above.

SERIES O (EQUITY INCOME SERIES)

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SERIES O (CONTINUED)

The investment program of the Series is based on several premises. First,
the Series' Sub-Adviser, T. Rowe Price, believes that, over time, dividend
income can account for a significant component of the total return from equity
investments. Second, dividends are normally a more stable and predictable
source of return than capital appreciation. While the price of a company's
stock generally increases or decreases in response to short-term earnings and
market fluctuations, its dividends are generally less volatile. Finally, T.
Rowe Price believes that stocks which distribute a high level of current income
tend to have less price volatility than those which have below average
dividends.
To achieve its objective, the Series, under normal circumstances, will
invest at least 65% of its assets in income-producing common stocks, whose
prospects for dividend growth and capital appreciation are considered favorable
by T. Rowe Price. To enhance capital appreciation potential, the Series also
uses a value-oriented approach, which means it invests in stocks it believes
are currently undervalued in the market place. The Series' investments will
generally be made in companies which share some of the following
characteristics: established operating histories; above-average current
dividend yields relative to the S&P 500; low price-earnings ratios relative to
the S&P 500; sound balance sheets and other financial characteristics; and low
stock price relative to company's underlying value as measured by assets,
earnings, cash flow or business franchises.
The Series may also invest its assets in fixed income securities
(corporate, government, and municipal bonds of various maturities). The Series
would invest in municipal bonds when the expected total return from such bonds
appears to exceed the total returns obtainable from corporate or government
bonds of similar credit quality.
Series O may invest in debt securities of any type without regard to
quality or rating. Such securities would be purchased in companies which meet
the investment criteria for the Series. Such securities may include securities
rated below investment grade (e.g., securities rated Ba or lower by Moody's or
BB or lower by S&P). The Series will not purchase such a security (commonly
referred to as a "junk bond") if immediately after such purchase the Series
would have more than 10% of its total assets invested in such securities. See
"Investment Methods and Risk Factors" - "Special Risks Associated with
Low-Rated and Comparable Unrated Debt Securities" for a discussion of the risks
associated with investing in such securities.
Although the Series will invest primarily in U.S. common stocks, it may
also purchase other types of securities, for example, foreign securities,
convertible securities, real estate investment trusts (REITs) and warrants,
when considered consistent with the Series' investment objective and program.
The Series' investments in foreign securities include non-dollar denominated
securities traded outside of the U.S. and dollar denominated securities traded
in the U.S. (such as ADRs). The Series may invest up to 25% of its total
assets in foreign securities. See the discussions of the risks associated with
investing in foreign securities under "American Depositary Receipts," "Currency
Fluctuations" and "Certain Risks of Foreign Investing."
The Series may also engage in a variety of investment management
practices, such as buying and selling futures and options. The Series may buy
and sell futures contracts (and options on such contracts) to manage its
exposure to changes in securities prices and foreign currencies and as an
efficient means of adjusting its overall exposure to certain markets. The
Series may purchase or write (sell) call and put options on securities,
financial indices, and foreign currencies. It is the Series' operating policy
that initial margin deposits and premiums on options used for non-hedging
purposes will not equal more than 5% of the Series' net asset value and, with
respect to options on securities, the total market value of securities against
which the Series has written call or put options may not exceed 25% of its
total assets. The Series will not commit more than 5% of its total assets to
premiums when purchasing call or put options. The Series may also invest up to
10% of its total assets in hybrid instruments which are described under
"Investment Methods and Risk Factors" - "Hybrid Instruments." Also see the
discussions of futures, options and forward currency transactions under
"Investment Methods and Risk Factors."
The Series may also invest in restricted securities described under
"Investment Methods and Risk Factors." The Series' investment in such
securities, other than Rule 144A securities, is limited to 5% of its net
assets. Series O may invest in securities on a "when-issued" or "delayed
delivery basis" as discussed in "Invesetment Methods and Risk Factors." The
Series may borrow up to 33 1/3% of its total assets; however, the Series may
not purchase securities when borrowings exceed 5% of its total assets. The
Series may hold a certain portion of its assets in money market securities,
including repurchase agreements, in the two highest rating categories, maturing
in one year or less. For temporary, defensive purposes, the Series may invest
without limitation in such

20
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SERIES O (CONTINUED)

securities. The Series may lend securities to broker-dealers, other
institutions, or other persons to earn additional income. The value of loaned
securities may not exceed 33 1/3% of the Series' total assets. See
"Investment Methods and Risk Factors" - "Lending of Portfolio Securities" for
a discussion of the risks associated with securities lending.

SERIES P (HIGH YIELD SERIES)

The investment objective of Series P is to seek high current income.
Capital appreciation is a secondary objective. Under normal circumstances, the
Series will seek its investment objective by investing primarily in a broad
range of income producing securities, including (i) higher yielding, higher
risk, debt securities (commonly referred to as "junk bonds"); (ii) preferred
stock; (iii) securities issued by foreign governments, their agencies and
instrumentalities, and foreign corporations, provided that such securities are
denominated in U.S. dollars; (iv) mortgage-backed securities ("MBSs"); (v)
asset-backed securities; (vi) securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (vii) securities issued or
guaranteed by, the Dominion of Canada or provinces thereof; and (viii) zero
coupon securities. Series P may also invest up to 35% of its assets in common
stocks (which may include ADRs), warrants and rights. Under normal
circumstances, at least 65% of the Series' total assets will be invested in
high-yielding, high risk debt securities.
Series P may invest up to 100% of its assets in debt securities that, at
the time of purchase, are rated below investment grade ("high yield securities"
or "junk bonds"), which involve a high degree of risk and are predominantly
speculative. For a description of debt ratings and a discussion of the risks
associated with investing in junk bonds, see "Investment Methods and Risk
Factors." Included in the debt securities which the Series may purchase are
convertible bonds, or bonds with warrants attached. A "convertible bond" is a
bond, debenture, or preferred share which may be exchanged by the owner for
common stock or another security, usually of the same company, in accordance
with the terms of the issue. A "warrant" confers upon the holder the right to
purchase an amount of securities at a particular time and price. See
"Investment Methods and Risk Factors" for a discussion of the risks associated
with such securities.
The Series may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. dollars. The
Series may also invest in debt securities issued by foreign governments
(including Brady Bonds), their agencies and instrumentalities and foreign
corporations (including those in emerging markets), provided such securities
are denominated in U.S. dollars. The Series' investment in foreign securities,
excluding Canadian securities, will not exceed 25% of the Series' net assets.
See "Investment Methods and Risk Factors" for a discussion of the risks
associated with investing in foreign securities, Brady Bonds and emerging
markets.
The Series may invest in MBSs, including mortgage pass-through securities
and collateralized mortgage obligations (CMOs). The Series may invest in
securities known as "inverse floating obligations," "residual interest bonds,"
and "interest only" (IO) and "principal only" (PO) bonds, the market values of
which generally will be more volatile than the market values of most MBSs.
This is due to the fact that such instruments are more sensitive to interest
rate changes and to the rate of principal prepayments than are most other MBSs.
The Series will hold less than 25% of its net assets in MBSs. For a
discussion of MBSs and the risks associated with such securities, see
"Investment Methods and Risk Factors."
The Series may also invest in asset-backed securities. These include
secured debt instruments backed by automobile loans, credit card loans, home
equity loans, manufactured housing loans and other types of secured loans
providing the source of both principal and interest payments. Asset-backed
securities are subject to risks similar to those discussed with respect to
MBSs. See "Investment Methods and Risk Factors."
The Series may invest in U.S. Government securities. U.S. Government
securities include bills, certificates of indebtedness, notes and bonds issued
by the Treasury or by agencies or instrumentalities of the U.S. Government.
The Series may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also are sold at substantial

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SERIES P (CONTINUED)

discounts but provide for the commencement of regular interest payments at a
deferred date. See "Investment Methods and Risk Factors" for a discussion of
zero coupon securities.
Series P may acquire certain securities that are restricted as to
disposition under federal securities laws, including securities eligible for
resale to qualified institutional investors pursuant to Rule 144A under the
Securities Act of 1933, subject to the Series' policy that not more than 15% of
the Series' net assets will be invested in illiquid assets. See "Investment
Methods and Risk Factors" for a discussion of restricted securities.
Series P may purchase securities on "when-issued" or "delayed delivery
basis" in excess of customary settlement periods for the type of security
involved. The Series may also purchase or sell securities on a "forward
commitment" basis and may enter into "repurchase agreements," "reverse
repurchase agreements" and "roll transactions." The Series may lend securities
to broker/dealers, other institutions or other persons to earn additional
income. The value of loaned securities may not exceed 33 1/3% of the Series'
total assets. In addition, the Series may purchase loans, loan participations
and other types of direct indebtedness.
The Series may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or as an efficient means of
adjusting its exposure to the bond market. The Series will not use futures
contracts for leveraging purposes. The Series will limit its use of futures
contracts so that initial margin deposits or premiums on such contracts used
for non-hedging purposes will not equal more than 5% of the Series' net asset
value. The Series may purchase call and put options and write such options on
a "covered" basis. The Series may also enter into interest rate and index
swaps and purchase or sell related caps, floors and collars. The aggregate
market value of the Series' portfolio securities covering call or put options
will not exceed 25% of the Series' net assets. See "Investment Methods and
Risk Factors" for a discussion of the risks associated with these types of
investments.
The Series' investment in warrants, valued at the lower of cost or market,
will not exceed 5% of the Series' net assets. Included within this amount, but
not to exceed 2% of the Series' net assets, may be warrants which are not
listed on the New York or American Stock Exchange. Warrants acquired by the
Series in units or attached to securities may be deemed to be without value.
From time to time, Series P may invest part or all of its assets in U.S.
Government securities, commercial notes or money market instruments. It is
anticipated that the weighted average maturity of the Series portfolio will
range from 5 to 15 years under normal circumstances.

SERIES S (SOCIAL AWARENESS SERIES)

The investment objective of Series S is to seek capital appreciation. In
seeking its objective, Series S will invest in various types of securities
which meet certain social criteria established for the Series. Series S will
invest in a diversified portfolio of common stocks (which may include ADRs),
convertible securities, preferred stocks and debt securities. See "Investment
Methods and Risk Factors" - "American Depositary Receipts." From time to time,
the Series may purchase government bonds or commercial notes on a temporary
basis for defensive purposes.
Series S will seek investments that comply with the Series' social
criteria and that offer investment potential. Because of the limitations on
investment imposed by the social criteria, the availability of investment
opportunities for the Series may be limited as compared to those of similar
funds which do not impose such restrictions on investment.
Securities selected for their appreciation possibilities will be primarily
common stocks or other securities having the investment characteristics of
common stocks, such as securities convertible into common stocks. Securities
will be selected on the basis of their appreciation and growth potential.
Securities considered to have capital appreciation and growth potential will
often include securities of smaller and less mature companies. Such companies
may present greater opportunities for capital appreciation because of high
potential earnings growth, but may also involve greater risk. They may have
limited product lines, markets or financial resources, and they may be
dependent on a limited management group. Their securities may trade less
frequently and in limited volume, and only in the over-the-counter market or on
smaller securities exchanges. As a result, the securities of smaller companies
may have limited marketability and may be subject to more abrupt or erratic
changes in value than securities of larger, more established companies. The
Series may also invest in larger companies where opportunities for
above-average capital appreciation appear favorable and the Series' social
criteria are satisfied.

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SERIES S (CONTINUED)

Series S may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio or as an efficient
means of adjusting its exposure to the stock market. The Series will limit its
use of futures contracts so that initial margin deposits or premiums on such
contracts used for non-hedging purposes will not equal more than 5 percent of
the Series' net assets. The Series may also write call and put options on a
covered basis and purchase put and call options on securities and financial
indices. The aggregate market value of the Series' portfolio securities
covering call or put options will not exceed 25 percent of the Series' net
assets. See the discussion of options and futures contracts under "Investment
Methods and Risk Factors."
Series S will not invest in securities of companies that engage in the
production of nuclear energy, alcoholic beverages or tobacco products.
In addition, the Series will not invest in securities of companies that
significantly engage in: (1) the manufacture of weapon systems; (2) practices
that, on balance, have a detrimental effect on the environment; or (3) the
gambling industry. Series S will monitor the activities identified above to
determine whether they are significant to an issuer's business. Significance
may be determined on the basis of the percentage of revenue generated by, or
the size of operations attributable to, such activities. The Series may invest
in an issuer that engages in the activities set forth above, in a degree that
is not deemed significant by the Investment Manager. In addition, the Series
will seek out companies that have contributed substantially to the communities
in which they operate, have a positive record on employment relations, have
made substantial progress in the promotion of women and minorities or in the
implementation of benefit policies that support working parents, or have taken
notably positive steps in addressing environmental challenges.
The Investment Manager will evaluate an issuer's activities to determine
whether it engages in any practices prohibited by the Series' social criteria.
In addition to its own research with respect to an issuer's activities, the
Investment Manager will also rely on other organizations that publish
information for investors concerning the social policy implications of
corporate activities. The Investment Manager may rely upon information provided
by advisory firms that provide social research on U.S. corporations, such as
Kinder, Lydenberg, Domini & Co., Inc., Franklin Insight, Inc. and
Prudential-Bache Capital Funding. Investment selection on the basis of social
attributes is a relatively new practice and the sources for this type of
information are not well established. The Investment Manager will continue to
identify and monitor sources of such information to screen issuers which do not
meet the social investment restrictions of the Series.
If after purchase of an issuer's securities by Series S, it is determined
that such securities do not comply with the Series' social criteria, the
securities will be eliminated from the Series' portfolio within a reasonable
time. This requirement may cause the Series to dispose of a security at a time
when it may be disadvantageous to do so.

SERIES V (VALUE SERIES)

The investment objective of Series V is to seek long-term growth of
capital. Series V will seek to achieve its objective through investment in a
diversified portfolio of securities. Under normal circumstances the Series
will consist primarily of various types of common stock, which may include
ADRs, and securities convertible into common stocks which the Investment
Manager believes are undervalued relative to assets, earnings, growth potential
or cash flows. See the discussion of ADRs under "Investment Methods and Risk
Factors." Under normal circumstances, the Series will invest at least 65
percent of its assets in the securities of companies which the Investment
Manager believes are undervalued.
Series V may also invest in (i) preferred stocks; (ii) warrants; and (iii)
investment grade debt securities (or unrated securities of comparable quality).
The Series may purchase securities on a "when-issued" or "delayed delivery
basis" in excess of customary settlement periods for the type of security
involved. The Series may purchase securities which are restricted as to
disposition under the federal securities laws, provided that such securities
are eligible for resale to qualified institutional investors pursuant to Rule
144A under the Securities Act of 1933 and subject to the Series' policy that
not more than 15 percent of its total assets will be invested in illiquid
securities. Series V reserves the right to invest its assets temporarily in
cash and money market instruments when, in the opinion of the Investment
Manager, it is advisable to do so on account of current or anticipated market
conditions. The Series may utilize repurchase agreements on an overnight basis
or bank demand accounts, pending investment in securities or to meet potential
redemptions or expenses. See the discussion of

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SERIES V (CONTINUED)

when-issued securities, Rule 144A securities and repurchase agreements under
"Investment Methods and Risk Factors."

SERIES X (SMALL CAP SERIES)

The investment objective of Series X is to seek long-term growth of
capital. The Series invests primarily in equity securities of small market
capitalization companies ("small company stocks"). Market capitalization means
the total market value of a company's outstanding common stock. The Series
anticipates that under normal market conditions, the Series will invest at
least 65% of its assets in equity securities of domestic and foreign companies
with market capitalizations of less than $1 billion at the time of purchase.
The equity securities in which the Series may invest include common stocks,
preferred stocks (both convertible and non-convertible), warrants and rights.
It is anticipated that the Series will invest primarily in companies whose
securities are traded on foreign or domestic stock exchanges or in the
over-the-counter market ("OTC"). The Series also may invest in securities of
emerging growth companies, some of which may have market capitalizations over $1
billion. Emerging growth companies are companies which have passed their
start-up phase and which show positive earnings and prospects of achieving
significant profit and gain in a relatively short period of time.
Under normal conditions, the Series intends to invest primarily in small
company stocks; however, the Series is also permitted to invest up to 35% of
its assets in equity securities of domestic and foreign issuers with a market
capitalization of more than $1 billion at the time of purchase, debt
obligations and domestic and foreign money market instruments, including
bankers acceptances, certificates of deposit and discount notes of U.S.
Government securities. Debt obligations in which the Series may invest will be
investment grade debt obligations, although the Series may invest up to 5% of
its assets in non-investment grade debt obligations. In addition, for
temporary or emergency purposes, the Series can invest up to 100% of total
assets in cash, cash equivalents, U.S. Government securities, commercial paper
and certain other money market instruments, as well as repurchase agreements
collateralized by these types of securities. The Series also may invest in
reverse repurchase and agreements and shares of other non-affiliated investment
companies. See the discussion of such securities under "Investment Methods and
Risk Factors."
The Series may purchase an unlimited number of foreign securities,
including securities of companies in emerging markets. The Series may invest
in foreign securities, either directly or indirectly through the use of
depositary receipts. Depositary receipts, including American Depositary
Receipts ("ADRs"), European Depository Receipts and American Depository Shares
are generally issued by banks or trust companies and evidence ownership of
underlying foreign securities. The Series also may invest in securities of
foreign investment funds or trusts (including passive foreign investment
companies). See the discussion of foreign securities, emerging growth stocks,
currency risk and ADRs under "Investment Methods and Risk Factors."
Some of the countries in which the Series may invest may not permit direct
investment by outside investors. Investment in such countries may only be
permitted through foreign government-approved or government-authorized
investment vehicles, which may include other investment companies. Investing
through such vehicles may involve frequent or layered fees or expenses and may
also be subject to limitation under the Investment Company Act of 1940. See
"Investment Methods and Risk Factors" - "Shares of Other Investment Companies"
in the Prospectus for more information.
The Series may purchase and sell foreign currency on a spot basis and may
engage in forward currency contracts, currency options and futures transactions
for hedging or risk management purposes. See the discussion of such
transactions and currency risk under "Investment Methods and Risk Factors."
At various times the Series may invest in derivative instruments for
hedging or risk management purposes or for any other permissible purpose
consistent with the Series' investment objective. Derivative transactions in
which the Series may engage include the writing of covered put and call options
on securities and the purchase of put and call options thereon, the purchase of
put and call options on securities indexes and exchange-traded options on
currencies and the writing of put and call options on securities indexes. The
Series may enter into spread transactions and swap agreements. The Series also
may buy and sell financial futures contracts which may include interest-rate
futures, futures on currency exchanges, and stock and bond index futures
contracts. The Series may enter into any futures contracts and related options
without limit for "bona fide hedging" purposes (as defined in the Commodity
Futures Trading Commission regulations) and for other permissible purposes,

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SERIES X (CONTINUED)

provided that aggregate initial margin and premiums on positions engaged in for
purposes other than "bona fide hedging" will not exceed 5% of its net asset
value, after taking into account unrealized profits and losses on such
contracts. See "Investment Methods and Risk Factors" for more information on
options, futures and other derivative instruments.
The Series may acquire warrants which are securities giving the holder the
right, but not the obligation, to buy the stock of an issuer at a given price
(generally higher than the value of the stock at the time of issuance), on a
specified date, during a specified period, or perpetually. Warrants may be
acquired separately or in connection with the acquisition of securities. The
Series may purchase warrants, valued at the lower of cost or market value, of
up to 5% of the Series' net assets. Included in that amount, but not to exceed
2% of the Series' net assets, may be warrants that are not listed on any
recognized U.S. or foreign stock exchange. Warrants acquired by the Series in
units or attached to securities are not subject to these restrictions.
The Series may engage in short selling against the box, provided that no
more that 15% of the value of the Series' net assets is in deposits on short
sales against the box at any one time. The Series also may invest in real
estate investment trusts ("REITs") and other real estate industry companies or
companies with substantial real estate investments. See the discussion of real
estate securities under "Investment Methods and Risk Factors."
The Series may invest in restricted securities, including Rule 144A
securities. See the discussion of restricted securities under "Investment
Methods and Risk Factors." The Series also may invest without limitation in
securities purchased on a when-issued or delayed delivery basis as discussed
under "Investment Methods and Risk Factors."
While there is careful selection and constant supervision by the Series'
Sub-Adviser, Strong Capital Management, Inc. ("Strong"), there can be no
guarantee that the Series' objective will be achieved. Strong invests in
companies whose earnings are believed to be in a relatively strong growth
trend, and, to a lesser extent, in companies in which significant further
growth is not anticipated but which are perceived to be undervalued. In
identifying companies with favorable growth prospects, Strong considers factors
such as prospects for above-average sales and earnings growth; high return on
invested capital; overall financial strength; competitive advantages, including
innovative products and services; effective research, product development and
marketing; and stable, capable management.
Investing in securities of small-sized and emerging growth companies may
involve greater risks than investing in larger, more established issuers since
these securities may have limited marketability and, thus, they may be more
volatile than securities of larger, more established companies or the market
averages in general. Because small-sized companies normally have fewer shares
outstanding than larger companies, it may be more difficult for the Series to
buy or sell significant numbers of such shares without an unfavorable impact on
prevailing prices. Small-sized companies may have limited product lines,
markets or financial resources and may lack management depth. In addition,
small-sized companies are typically subject to wider variations in earnings and
business prospects than are larger, more established companies. There is
typically less publicly available information concerning small-sized companies
than for larger, more established ones.
Securities of issuers in "special situations" also may be more volatile,
since the market value of these securities may decline in value if the
anticipated benefits do not materialize. Companies in "special situations"
include, but are not limited to, companies involved in an acquisition or
consolidation; reorganization; recapitalization; merger, liquidation or
distribution of cash, securities or other assets; a tender or exchange offer, a
breakup or workout of a holding company; litigation which, if resolved
favorably, would improve the value of the companies' securities; or a change in
corporate control.
Although investing in securities of emerging growth companies or issuers
in "special situations" offers potential for above-average returns if the
companies are successful, the risk exists that the companies will not succeed
and the prices of the companies' shares could significantly decline in value.
Therefore, an investment in the Series may involve a greater degree of risk
than an investment in other mutual funds that seek long-term growth of capital
by investing in better-known, larger companies.

INVESTMENT METHODS AND RISK FACTORS

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

Factors" sections of the Prospectus and in this Statement of Additional
Information. The following is a description of certain additional risk factors
related to various securities, instruments and techniques. The risks so
described only apply to those Series which may invest in such securities and
instruments or which use such techniques. Also included is a general
description of some of the investment instruments, techniques and methods which
may be used by one or more of the Series. The methods described only apply to
those Series which may use such methods. Although a Series may employ the
techniques, instruments and methods described below, consistent with its
investment objective and policies and any applicable law, no Series will be
required to do so.
AMERICAN DEPOSITARY RECEIPTS. Each of the Series (except Series C and E)
of the Fund may purchase American Depositary Receipts ("ADRs") which are issued
generally by U.S. banks and which represent the deposit with the bank of a
foreign company's securities. ADRs are publicly traded on exchanges or
over-the-counter in the United States. Investors should consider carefully the
substantial risks involved in investing in securities issued by companies of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. ADRs and European Depositary Receipts ("EDRs") or other securities
convertible into securities of issuers based in foreign countries are not
necessarily denominated in the same currency as the securities into which they
may be converted. Generally, ADRs, in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets, while EDRs
(also referred to as Continental Depositary Receipts ("CDRs"), in bearer form,
may be denominated in other currencies and are designed for use in European
securities markets. ADRs are receipts typically issued by a U.S. bank or trust
company evidencing ownership of the underlying securities. EDRs are European
receipts evidencing a similar arrangement. For purposes of the Series'
investment policies, ADRs and EDRs are deemed to have the same classification as
the underlying securities they represent. Thus, an ADR or EDR representing
ownership of common stock will be treated as common stock.
Depositary receipts are issued through "sponsored" or "unsponsored"
facilities. A sponsored facility is established jointly by the issuer of the
underlying security and a depositary, whereas a depositary may establish an
unsponsored facility without participation by the issuer of the deposited
security. Holders of unsponsored depositary receipts generally bear all the
cost of such facilities and the depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through voting
rights to the holders of such receipts in respect of the deposited securities.
SHARES OF OTHER INVESTMENT COMPANIES. Certain of the Series may invest in
shares of other investment companies. The Series' investment in shares of
other investment companies may not exceed immediately after purchase 10 percent
of the Series' total assets and no more than 5 percent of its total assets may
be invested in the shares of any one investment company. Investment in the
shares of other investment companies has the effect of requiring shareholders
to pay the operating expenses of two mutual funds.
REPURCHASE AGREEMENTS. A repurchase agreement involves a purchase by the
Series of a security from a selling financial institution (such as a bank,
savings and loan association or broker-dealer) which agrees to repurchase such
security at a specified price and at a fixed time in the future, usually not
more than seven days from the date of purchase. The resale price is in excess
of the purchase price and reflects an agreed upon yield effective for the
period of time the Series' money is invested in the security.
Currently, Series A, B, C, E, S, J, P and V may enter into repurchase
agreements only with federal reserve system member banks with total assets of
at least one billion dollars and equity capital of at least one hundred million
dollars and "primary" dealers in U.S. Government securities. These Series may
enter into repurchase agreements, fully collateralized by U.S. Government or
agency securities, only on an overnight basis.
Repurchase agreements are considered to be loans by the Fund under the
Investment Company Act of 1940. Engaging in any repurchase transaction will be
subject to any rules or regulations of the Securities and Exchange Commission
or other regulatory authorities. Not more than 10% of the assets of Series A,
B, C, D, E, S and J will be invested in illiquid assets, which include
repurchase agreements with maturities of over seven days.
Series D and K may enter into repurchase agreements only with (a)
securities dealers that have a total capitalization of at least $40,000,000 and
a ratio of aggregate indebtedness to net capital of no more than 4 to 1, or,
alternatively, net capital equal to 6% of aggregate debit balances, or (b)
banks that have at least $1,000,000,000 in assets and a net worth of at least
$100,000,000 as of its most recent annual report. In addition,

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

the aggregate repurchase price of all repurchase agreements held by each Series
with any broker shall not exceed 15% of the total assets of the Series or
$5,000,000, whichever is greater. The Series will not enter into repurchase
agreements maturing in more than seven days if the aggregate of such repurchase
agreements and other illiquid investments would exceed 10% of total assets for
Series D or 15% of net assets for Series K.
Series M and X may enter into repurchase agreements with (a)
well-established securities dealers or (b) banks that are members of the
Federal Reserve System. Any such dealer or bank will have a credit rating with
respect to its short-term debt of at least A1 by Standard & Poor's Corporation,
P1 by Moody's Investors Service, Inc., or the equivalent rating by the
Investment Manager or relevant Sub-Adviser. Series M and X may enter into
repurchase agreements with maturities of over seven days, provided that neither
may invest more than 15% of its total assets in illiquid securities.
Series N and O may enter into repurchase agreements only with (a)
securities dealers that have a net capital in excess of $50,000,000, are
reasonably leveraged, and are otherwise considered as appropriate entities with
which to enter into repurchase agreements, or (b) banks that are included on T.
Rowe Price's list of established banks. To determine whether a dealer or bank
qualifies under these criteria, T. Rowe Price's Credit Committee will conduct a
thorough examination to determine that the applicable financial and
profitability standards have been met. Series N and O will not under any
circumstances enter into a repurchase agreement of a duration of more than
seven business days if, as a result, more than 15% of the value of the Series'
total assets would be so invested or invested in illiquid securities.
Generally, the Series will not commit more than 50% of its gross assets to
repurchase agreements or more than 5% of its total assets to repurchase
agreements of any one vendor.
In the event of a bankruptcy or other default of a seller of a repurchase
agreement, the Series could experience both delays in liquidating the
underlying securities and losses, including (a) possible decline in the value
of the underlying security during the period while the Series seeks to enforce
its rights thereto; (b) possible subnormal levels of income and lack of access
to income during this period; and (c) expenses of enforcing its rights. The
Board of Directors of the Fund has promulgated guidelines with respect to
repurchase agreements.
REAL ESTATE SECURITIES. Certain Series may invest in equity securities of
real estate investment trusts ("REITs") and other real estate industry
companies or companies with substantial real estate investments and therefore,
such Series may be subject to certain risks associated with direct ownership of
real estate and with the real estate industry in general. These risks include,
among others: possible declines in the value of real estate; possible lack of
availability of mortgage funds; extended vacancies of properties; risks related
to general and local economic conditions; overbuilding; increases in
competition, property taxes and operating expenses; changes in zoning laws;
costs resulting from the clean-up of, and liability to third parties for
damages resulting from, environmental problems; casualty or condemnation
losses; uninsured damages from floods, earthquakes or other natural disasters;
limitations on and variations in rents; and changes in interest rates.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Internal Revenue Code, as amended ( the "Code"). Certain REITs may be
self-liquidating in that a specific term of existence is provided for in the
trust document. Such trusts run the risk of liquidating at an economically
inopportune time.
DEBT OBLIGATIONS. Yields on short, intermediate, and long-term securities
are dependent on a variety of factors, including the general conditions of the
money and bond markets, the size of a particular offering, the maturity of the
obligation, and the rating of the issue. Debt securities with longer
maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market prices of debt securities
usually vary, depending upon available yields. An increase in interest rates
will generally reduce the value of portfolio investments, and a decline in
interest rates will generally increase the value of portfolio investments. The
ability of the Series to achieve its investment objectives is also dependent on
the continuing ability of the issuers of the debt securities in which the
Series invest to meet their obligations for the payment of interest and
principal when due.

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

SPECIAL RISKS ASSOCIATED WITH LOW-RATED AND COMPARABLE UNRATED DEBT
SECURITIES. Low-rated and comparable unrated securities, while generally
offering higher yields than investment-grade securities with similar
maturities, involve greater risks, including the possibility of default or
bankruptcy. They are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. The special risk
considerations in connection with such investments are discussed below. See
the Appendix of this Statement of Additional Information for a discussion of
securities ratings.
The low-rated and comparable unrated securities market is relatively new,
and its growth paralleled a long economic expansion. As a result, it is not
clear how this market may withstand a prolonged recession or economic downturn.
Such a prolonged economic downturn could severely disrupt the market for and
adversely affect the value of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of low-rated and comparable unrated securities tend to reflect
individual corporate developments to a greater extent than do higher-rated
securities, which react primarily to fluctuations in the general level of
interest rates. Low-rated and comparable unrated securities also tend to be
more sensitive to economic conditions than are higher-rated securities. As a
result, they generally involve more credit risks than securities in the
higher-rated categories. During an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of low-rated and comparable
unrated securities may experience financial stress and may not have sufficient
revenues to meet their payment obligations. The issuer's ability to service
its debt obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by an issuer of low-rated and comparable unrated securities is
significantly greater than issuers of higher-rated securities because such
securities are generally unsecured and are often subordinated to other
creditors. Further, if the issuer of a low-rated and comparable unrated
security defaulted, a Series might incur additional expenses to seek recovery.
Periods of economic uncertainty and changes would also generally result in
increased volatility in the market prices of low-rated and comparable unrated
securities and thus in a Series' net asset value.
As previously stated, the value of such a security will decrease in a
rising interest rate market and accordingly, so will a Series' net asset value.
If a Series experiences unexpected net redemptions in such a market, it may be
forced to liquidate a portion of its portfolio securities without regard to
their investment merits. Due to the limited liquidity of high-yield securities
(discussed below) a Series may be forced to liquidate these securities at a
substantial discount. Any such liquidation would reduce a Series' asset base
over which expenses could be allocated and could result in a reduced rate of
return for a Series.
Low-rated and comparable unrated securities typically contain redemption,
call, or prepayment provisions which permit the issuer of such securities
containing such provisions to, at their discretion, redeem the securities.
During periods of falling interest rates, issuers of high-yield securities are
likely to redeem or prepay the securities and refinance them with debt
securities with a lower interest rate. To the extent an issuer is able to
refinance the securities or otherwise redeem them, a Series may have to replace
the securities with a lower-yielding security, which would result in a lower
return for a Series.
Credit ratings issued by credit-rating agencies evaluate the safety of
principal and interest payments of rated securities. They do not, however,
evaluate the market value risk of low-rated and comparable unrated securities
and, therefore, may not fully reflect the true risks of an investment. In
addition, credit-rating agencies may or may not make timely changes in a rating
to reflect changes in the economy or in the condition of the issuer that affect
the market value of the security. Consequently, credit ratings are used only
as a preliminary indicator of investment quality. Investments in low-rated and
comparable unrated securities will be more dependent on the Investment Manager
or relevant Sub-Adviser's credit analysis than would be the case with
investments in investment-grade debt securities. The Investment Manager or
relevant Sub-Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history, and the current trend of earnings. The Investment Manager or
relevant Sub-Adviser continually monitors the investments in a Series'
portfolio and carefully evaluates whether to dispose of or to retain low-rated
and comparable unrated securities whose credit ratings or credit quality may
have changed.

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

A Series may have difficulty disposing of certain low-rated and comparable
unrated securities because there may be a thin trading market for such
securities. Because not all dealers maintain markets in all low-rated and
comparable unrated securities, there is no established retail secondary market
for many of these securities. A Series anticipates that such securities could
be sold only to a limited number of dealers or institutional investors. To the
extent a secondary trading market does exist, it is generally not as liquid as
the secondary market for higher-rated securities. The lack of a liquid
secondary market may have an adverse impact on the market price of the
security. As a result, a Series' asset value and a Series' ability to dispose
of particular securities, when necessary to meet a Series' liquidity needs or
in response to a specific economic event, may be impacted. The lack of a
liquid secondary market for certain securities may also make it more difficult
for the Fund to obtain accurate market quotations for purposes of valuing a
Series. Market quotations are generally available on many low-rated and
comparable unrated issues only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
During periods of thin trading, the spread between bid and asked prices is
likely to increase significantly. In addition, adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of low-rated and comparable unrated securities, especially
in a thinly-traded market.
Recent legislation has been adopted and from time to time, proposals have
been discussed regarding new legislation designed to limit the use of certain
low-rated and comparable unrated securities by certain issuers. An example of
legislation is a recent law which requires federally insured savings and loan
associations to divest their investment in these securities over time. New
legislation could further reduce the market because such legislation,
generally, could negatively affect the financial condition of the issuers of
high-yield securities, and could adversely affect the market in general. It is
not currently possible to determine the impact of the recent legislation on
this market. However, it is anticipated that if additional legislation is
enacted or proposed, it could have a material effect on the value of low-rated
and comparable unrated securities and the existence of a secondary trading
market for the securities.

PUT AND CALL OPTIONS:

WRITING (SELLING) COVERED CALL OPTIONS. A call option gives the holder
(buyer) the "right to purchase" a security or currency at a specified price
(the exercise price), at expiration of the option (European style) or at any
time until a certain date (the expiration date) (American style). So long as
the obligation of the writer of a call option continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was sold,
requiring him to deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the expiration of the call
option, or such earlier time at which the writer effects a closing purchase
transaction by repurchasing an option identical to that previously sold.
Certain Series may write (sell) "covered" call options and purchase
options to close out options previously written by the Series. In writing
covered call options, the Series expects to generate additional premium income
which should serve to enhance the Series' total return and reduce the effect of
any price decline of the security or currency involved in the option. Covered
call options will generally be written on securities or currencies which, in
the opinion of the Investment Manager or relevant Sub-Adviser, are not expected
to have any major price increases or moves in the near future but which, over
the long term, are deemed to be attractive investments for the Series.
The Series will write only covered call options. This means that the
Series will own the security or currency subject to the option or an option to
purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an
account consisting of cash or liquid securities having a value equal to the
fluctuating market value of the optioned securities or currencies. In order to
comply with the requirements of several states, the Series will not write a
covered call option if, as a result, the aggregate market value of all Series
securities or currencies covering call or put options exceeds 25% of the market
value of the Series' net assets. Should these state laws change or should the
Series obtain a waiver of their application, the Series reserve the right to
increase this percentage. In calculating the 25% limit, the Series will
offset, against the value of assets covering written calls and puts, the value
of purchased calls and puts on identical securities or currencies with
identical maturity dates.

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

Series securities or currencies on which call options may be written will
be purchased solely on the basis of investment considerations consistent with
the Series' investment objectives. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the Series
will not do), but capable of enhancing the Series' total return. When writing
a covered call option, the Series, in return for the premium, gives up the
opportunity for profit from a price increase in the underlying security or
currency above the exercise price, but conversely, retains the risk of loss
should the price of the security or currency decline. Unlike one who owns
securities or currencies not subject to an option, the Series has no control
over when it may be required to sell the underlying securities or currencies,
since it may be assigned an exercise notice at any time prior to the expiration
of its obligations as a writer. If a call option which the Series has written
expires, the Series will realize a gain in the amount of the premium; however,
such gain may be offset by a decline in the market value of the underlying
security or currency during the option period. If the call option is
exercised, the Series will realize a gain or loss from the sale of the
underlying security or currency.
Call options written by the Series will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to
time, the Series may purchase an underlying security or currency for delivery
in accordance with an exercise notice of a call option assigned to it, rather
than delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The premium received is the market value of an option. The premium the
Series will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, the Investment
Manager or relevant Sub-Adviser, in determining whether a particular call
option should be written on a particular security or currency, will consider
the reasonableness of the anticipated premium and the likelihood that a liquid
secondary market will exist for those options. The premium received by the
Series for writing covered call options will be recorded as a liability of the
Series. This liability will be adjusted daily to the option's current market
value, which will be the latest sale price at the time at which the net asset
value per share of the Series is computed (close of the New York Stock
Exchange), or, in the absence of such sale, the latest asked price. The option
will be terminated upon expiration of the option, the purchase of an identical
option in a closing transaction, or delivery of the underlying security or
currency upon the exercise of the option.
The Series will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Series.
WRITING (SELLING) COVERED PUT OPTIONS. A put option gives the purchaser
of the option the right to sell, and the writer (seller) has the obligation to
buy, the underlying security or currency at the exercise price during the
option period (American style) or at the expiration of the option (European
style). So long as the obligation of the writer continues, he may be assigned
an exercise notice by the broker-dealer through whom such option was sold,
requiring him to make payment of the exercise price against delivery of the
underlying security or currency. The operation of put options in other
respects, including their related risks and rewards, is substantially identical
to that of call options. Certain Series may write American or European style
covered put options and purchase options to close out options previously
written by the Series.
Certain Series may write put options on a covered basis, which means that
the Series would either (i) maintain in a segregated account cash or liquid
securities in an amount not less than the exercise price at all times while the
put option is outstanding; (ii) sell short the security or currency underlying
the put option at the same or higher price than the exercise price of the put
option; or (iii) purchase an option to sell the underlying security or currency
subject to the option having an exercise price equal to or greater than the
exercise price of the "covered" option at all times while the put option is
outstanding. (The rules of a clearing corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price.) The
Series would generally write covered put options in circumstances where the
Investment Manager or relevant Sub-Adviser wishes to purchase the

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

underlying security or currency for the Series' portfolio at a price lower than
the current market price of the security or currency. In such event the Series
would write a put option at an exercise price which, reduced by the premium
received on the option, reflects the lower price it is willing to pay. Since
the Series would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this technique could be
used to enhance current return during periods of market uncertainty. The risk
in such a transaction would be that the market price of the underlying security
or currency would decline below the exercise price less the premiums received.
Such a decline could be substantial and result in a significant loss to the
Series. In addition, the Series, because it does not own the specific
securities or currencies which it may be required to purchase in the exercise
of the put, can not benefit from appreciation, if any, with respect to such
specific securities or currencies. In order to comply with the requirements of
several states, the Series will not write a covered put option if, as a result,
the aggregate market value of all portfolio securities or currencies covering
put or call options exceeds 25% of the market value of the Series' net assets.
Should these state laws change or should the Series obtain a waiver of their
application, the Series reserve the right to increase this percentage. In
calculating the 25% limit, the Series will offset against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies.
PREMIUM RECEIVED FROM WRITING CALL OR PUT OPTIONS. A Series will receive
a premium from writing a put or call option, which increases such Series'
return in the event the option expires unexercised or is closed out at a
profit. The amount of the premium will reflect, among other things, the
relationship of the market price of the underlying security to the exercise
price of the option, the term of the option and the volatility of the market
price of the underlying security. By writing a call option, a Series limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, a Series assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
value, resulting in a potential capital loss if the purchase price exceeds the
market value plus the amount of the premium received, unless the security
subsequently appreciates in value.
CLOSING TRANSACTIONS. Closing transactions may be effected in order to
realize a profit on an outstanding call option, to prevent an underlying
security or currency from being called, or to permit the sale of the underlying
security or currency. A Series may terminate an option that it has written
prior to its expiration by entering into a closing purchase transaction in
which it purchases an option having the same terms as the option written. A
Series will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option. In the case of a put option, any loss so incurred may be partially or
entirely offset by the premium received from a simultaneous or subsequent sale
of a different put option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the purchase of a call option is likely to be
offset in whole or in part by unrealized appreciation of the underlying
security owned by such Series.
Furthermore, effecting a closing transaction will permit the Series to
write another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Series desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security or
currency. There is, of course, no assurance that the Series will be able to
effect such closing transactions at a favorable price. If the Series cannot
enter into such a transaction, it may be required to hold a security or
currency that it might otherwise have sold. When the Series writes a covered
call option, it runs the risk of not being able to participate in the
appreciation of the underlying securities or currencies above the exercise
price, as well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in higher
transaction costs. The Series will pay transaction costs in connection with
the writing of options to close out previously written options. Such
transaction costs are normally higher than those applicable to purchases and
sales of portfolio securities.
PURCHASING CALL OPTIONS. Certain Series may purchase American or European
call options. The Series may enter into closing sale transactions with respect
to such options, exercise them or permit them to expire. The Series may
purchase call options for the purpose of increasing its current return.
Call options may also be purchased by a Series for the purpose of
acquiring the underlying securities or currencies for its portfolio. Utilized
in this fashion, the purchase of call options enables the Series to acquire the

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

securities or currencies at the exercise price of the call option plus the
premium paid. At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities or currencies
directly. This technique may also be useful to a Series in purchasing a large
block of securities or currencies that would be more difficult to acquire by
direct market purchases. So long as it holds such a call option rather than
the underlying security or currency itself, the Series is partially protected
from any unexpected decline in the market price of the underlying security or
currency and in such event could allow the call option to expire, incurring a
loss only to the extent of the premium paid for the option.
To the extent required by the laws of certain states, a Series may not be
permitted to commit more than 5% of its assets to premiums when purchasing call
and put options. Should these state laws change or should the Series obtain a
waiver of their application, the Series may commit more than 5% of its assets
to premiums when purchasing call and put options. The Series may also
purchase call options on underlying securities or currencies it owns in order
to protect unrealized gains on call options previously written by it. Call
options may also be purchased at times to avoid realizing losses. For example,
where the Series has written a call option on an underlying security or currency
having a current market value below the price at which such security or currency
was purchased by the Series, an increase in the market price could result in the
exercise of the call option written by the Series and the realization of a loss
on the underlying security or currency with the same exercise price and
expiration date as the option previously written.
PURCHASING PUT OPTIONS. Certain Series may purchase American or European
style put options. The Series may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. A Series may
purchase a put option on an underlying security or currency (a "protective
put") owned by the Series as a defensive technique in order to protect against
an anticipated decline in the value of the security or currency. Such hedge
protection is provided only during the life of the put option when the Series,
as the holder of the put option, is able to sell the underlying security or
currency at the put exercise price regardless of any decline in the underlying
security's market price or currency's exchange value. The premium paid for the
put option and any transaction costs would reduce any capital gain otherwise
available for distribution when the security or currency is eventually sold.
A Series may purchase put options at a time when the Series does not own
the underlying security or currency. By purchasing put options on a security
or currency it does not own, the Series seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price during
the life of the put option, the Series will lose its entire investment in the
put option. In order for the purchase of a put option to be profitable, the
market price of the underlying security or currency must decline sufficiently
below the exercise price to cover the premium and transaction costs, unless the
put option is sold in a closing sale transaction.
DEALER OPTIONS. Certain Series may engage in transactions involving
dealer options. Certain risks are specific to dealer options. While the
Series would look to a clearing corporation to exercise exchange-traded
options, if the Series were to purchase a dealer option, it would rely on the
dealer from whom it purchased the option to perform if the option were
exercised. Exchange-traded options generally have a continuous liquid market
while dealer options have none. Consequently, the Series will generally be
able to realize the value of a dealer option it has purchased only by
exercising it or reselling it to the dealer who issued it. Similarly, when the
Series writes a dealer option, it generally will be able to close out the
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Series originally wrote the option.
While the Series will seek to enter into dealer options only with dealers who
will agree to and which are expected to be capable of entering into closing
transactions with the Series, there can be no assurance that the Series will be
able to liquidate a dealer option at a favorable price at any time prior to
expiration. Failure by the dealer to do so would result in the loss of the
premium paid by the Series as well as loss of the expected benefit of the
transaction. Until the Series, as a covered dealer call option writer, is able
to effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used as cover until the option expires or is
exercised. In the event of insolvency of the contra party, the Series may be
unable to liquidate a dealer option. With respect to options written by the
Series, the inability to enter into a closing transaction may result in
material losses to the Series. For example, since the Series must maintain a
secured position with respect to any call option on a security it writes,

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

the Series may not sell the assets which it has segregated to secure the
position while it is obligated under the option. This requirement may impair
the Series' ability to sell portfolio securities at a time when such sale might
be advantageous.
The Staff of the SEC has taken the position that purchased dealer options
and the assets used to secure the written dealer options are illiquid
securities. The Series may treat the cover used for written OTC options as
liquid if the dealer agrees that the Series may repurchase the OTC option it
has written for a maximum price to be calculated by a predetermined formula.
In such cases, the OTC option would be considered illiquid only to the extent
the maximum repurchase price under the formula exceeds the intrinsic value of
the option. To this extent, the Series will treat dealer options as subject to
the Series' limitation on illiquid securities. If the SEC changes its position
on the liquidity of dealer options, the Series will change its treatment of
such instruments accordingly.
CERTAIN RISK FACTORS IN WRITING CALL OPTIONS AND IN PURCHASING CALL AND
PUT OPTIONS: During the option period, a Series, as writer of a call option
has, in return for the premium received on the option, given up the opportunity
for capital appreciation above the exercise price should the market price of
the underlying security increase, but has retained the risk of loss should the
price of the underlying security decline. The writer has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. The risk of purchasing a call or put option is that the Series may
lose the premium it paid plus transaction costs. If the Series does not
exercise the option and is unable to close out the position prior to expiration
of the option, it will lose its entire investment.
An option position may be closed out only on an exchange which provides a
secondary market. There can be no assurance that a liquid secondary market
will exist for a particular option at a particular time and that the Series can
close out its position by effecting a closing transaction. If the Series is
unable to effect a closing purchase transaction, it cannot sell the underlying
security until the option expires or the option is exercised. Accordingly, the
Series may not be able to sell the underlying security at a time when it might
otherwise be advantageous to do so. Possible reasons for the absence of a
liquid secondary market include the following: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities;
(iv) inadequacy of the facilities of an exchange or the clearing corporation to
handle trading volume; and (v) a decision by one or more exchanges to
discontinue the trading of options or impose restrictions on orders. In
addition, the hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the options
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot
be reflected in the options markets. The purchase of options is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary Series securities transactions.
Each exchange has established limitations governing the maximum number of
call options, whether or not covered, which may be written by a single investor
acting alone or in concert with others (regardless of whether such options are
written on the same or different exchanges or are held or written on one or
more accounts or through one or more brokers). An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions.
OPTIONS ON STOCK INDICES. Options on stock indices are similar to options
on specific securities except that, rather than the right to take or make
delivery of the specific security at a specific price, an option on a stock
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of that stock index is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
multiplied by a specified multiple. The writer of the option is obligated, in
return for the premium received, to make delivery of this amount. Unlike
options on specific securities, all settlements of options on stock indices are
in cash and gain or loss depends on general movements in the stocks included in
the index rather than price movements in particular stocks. A stock index
futures contract is an agreement in which one party agrees to deliver to the
other an amount of cash equal to a specific amount multiplied by the difference
between the value of a specific stock index at the close of the last trading
day of the contract and the price at which the agreement is made. No physical
delivery of securities is made.

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

RISK FACTORS IN OPTIONS ON INDICES. Because the value of an index option
depends upon the movements in the level of the index rather than upon movements
in the price of a particular security, whether the Series will realize a gain
or a loss on the purchase or sale of an option on an index depends upon the
movements in the level of prices in the market generally or in an industry or
market segment rather than upon movements in the price of the individual
security. Accordingly, successful use of positions will depend upon the
ability of the Investment Manager or relevant Sub-Adviser to predict correctly
movements in the direction of the market generally or in the direction of a
particular industry. This requires different skills and techniques than
predicting changes in the prices of individual securities.
Index prices may be distorted if trading of securities included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number
of securities in the index. If this occurred, a Series would not be able to
close out options which it had written or purchased and, if restrictions on
exercise were imposed, might be unable to exercise an option it purchased,
which would result in substantial losses.
Price movements in Series securities will not correlate perfectly with
movements in the level of the index and therefore, a Series bears the risk that
the price of the securities may not increase as much as the level of the index.
In this event, the Series would bear a loss on the call which would not be
completely offset by movements in the prices of the securities. It is also
possible that the index may rise when the value of the Series' securities does
not. If this occurred, a Series would experience a loss on the call which
would not be offset by an increase in the value of its securities and might
also experience a loss in the market value of its securities.
Unless a Series has other liquid assets which are sufficient to satisfy
the exercise of a call on the index, the Series will be required to liquidate
securities in order to satisfy the exercise.
When a Series has written a call on an index, there is also the risk that
the market may decline between the time the Series has the call exercised
against it, at a price which is fixed as of the closing level of the index on
the date of exercise, and the time the Series is able to sell securities. As
with options on securities, the Investment Manager or relevant Sub-Adviser will
not learn that a call has been exercised until the day following the exercise
date, but, unlike a call on securities where the Series would be able to
deliver the underlying security in settlement, the Series may have to sell part
of its securities in order to make settlement in cash, and the price of such
securities might decline before they could be sold.
If a Series exercises a put option on an index which it has purchased
before final determination of the closing index value for the day, it runs the
risk that the level of the underlying index may change before closing. If this
change causes the exercised option to fall "out-of-the-money" the Series will
be required to pay the difference between the closing index value and the
exercise price of the option (multiplied by the applicable multiplier) to the
assigned writer. Although the Series may be able to minimize this risk by
withholding exercise instructions until just before the daily cutoff time or by
selling rather than exercising an option when the index level is close to the
exercise price, it may not be possible to eliminate this risk entirely because
the cutoff time for index options may be earlier than those fixed for other
types of options and may occur before definitive closing index values are
announced.
TRADING IN FUTURES. Certain Series may enter into financial futures
contracts, including stock and bond index, interest rate and currency futures
("futures or futures contracts"). A futures contract provides for the future
sale by one party and purchase by another party of a specified amount of a
specific financial instrument (e.g., units of a stock index) for a specified
price, date, time and place designated at the time the contract is made.
Brokerage fees are incurred when a futures contract is bought or sold and
margin deposits must be maintained. Entering into a contract to buy is
commonly referred to as buying or purchasing a contract or holding a long
position. Entering into a contract to sell is commonly referred to as selling
a contract or holding a short position.
Unlike when the Series purchases or sells a security, no price would be
paid or received by the Series upon the purchase or sale of a futures contract.
Upon entering into a futures contract, and to maintain the Series' open
positions in futures contracts, the Series would be required to deposit with
its custodian in a segregated account in the name of the futures broker an
amount of cash or liquid securities, known as "initial margin." The margin
required for a particular futures contract is set by the exchange on which the
contract is traded, and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

customarily purchased and sold on margins that may range upward from less than
5% of the value of the contract being traded.
Margin is the amount of funds that must be deposited by the Series with
its custodian in a segregated account in the name of the futures commission
merchant in order to initiate futures trading and to maintain the Series' open
position in futures contracts. A margin deposit is intended to ensure the
Series' performance of the futures contract. The margin required for a
particular futures contract is set by the exchange on which the futures
contract is traded, and may be significantly modified from time to time by the
exchange during the term of the futures contract.
If the price of an open futures contract changes (by increase in the case
of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the margin.
However, if the value of a position increases because of favorable price
changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Series.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." The Series expects
to earn interest income on its margin deposits. Although certain futures
contracts, by their terms, require actual future delivery of and payment for
the underlying instruments, in practice most futures contracts are usually
closed out before the delivery date. Closing out an open futures contract
purchase or sale is effected by entering into an offsetting futures contract
purchase or sale, respectively, for the same aggregate amount of the identical
securities and the same delivery date. If the offsetting purchase price is
less than the original sale price, the Series realizes a gain; if it is more,
the Series realizes a loss. Conversely, if the offsetting sale price is more
than the original purchase price, the Series realizes a gain; if it is less,
the Series realizes a loss. The transaction costs must also be included in
these calculations. There can be no assurance, however, that the Series will
be able to enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Series is not able to enter into
an offsetting transaction, the Series will continue to be required to maintain
the margin deposits on the futures contract.
For example, the Standard & Poor's 500 Stock Index is composed of 500
selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 500 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 500 Index, contracts are
to buy or sell 500 units. Thus, if the value of the S&P 500 Index were $150,
one contract would be worth $75,000 (500 units x $150). The stock index
futures contract specifies that no delivery of the actual stock making up the
index will take place. Instead, settlement in cash occurs. Over the life of
the contract, the gain or loss realized by the Fund will equal the difference
between the purchase (or sale) price of the contract and the price at which the
contract is terminated. For example, if the Fund enters into a futures
contract to buy 500 units of the S&P 500 Index at a specified future date at a
contract price of $150 and the S&P 500 Index is at $154 on that future date,
the Fund will gain $2,000 (500 units x gain of $4). If the Fund enters into a
futures contract to sell 500 units of the stock index at a specified future
date at a contract price of $150 and the S&P 500 Index is at $152 on that
future date, the Fund will lose $1,000 (500 units x loss of $2).
Options on futures are similar to options on underlying instruments except
that options on futures give the purchaser the right, in return for the premium
paid, to assume a position in a futures contract (a long position if the option
is a call and a short position if the option is a put), rather than to purchase
or sell the futures contract, at a specified exercise price at any time during
the period of the option. Upon exercise of the option, the delivery of the
futures position by the writer of the option to the holder of the option will
be accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price of
the futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the futures
contract. Alternatively, settlement may be made totally in cash. Purchasers
of options who fail to exercise their options prior to the exercise date suffer
a loss of the premium paid.
The writer of an option on a futures contract is required to deposit
margin pursuant to requirements similar to those applicable to futures
contracts. Upon exercise of an option on a futures contract, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

balance in the writer's margin account. This amount will be equal to the
amount by which the market price of the futures contract at the time of
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.
Commissions on financial futures contracts and related options
transactions may be higher than those which would apply to purchases and sales
of securities directly. From time to time, a single order to purchase or sell
futures contracts (or options thereon) may be made on behalf of the Series and
other mutual funds or portfolios of mutual funds for which the Investment
Manager or relevant Sub-Adviser serves as adviser or sub-adviser. Such
aggregated orders would be allocated among the Series and such other mutual
funds or series of mutual funds in a fair and non-discriminatory manner.
A public market exists in interest rate futures contracts covering
primarily the following financial instruments: U.S. Treasury bonds; U.S.
Treasury notes; Government National Mortgage Association ("GNMA") modified
pass-through mortgage-backed securities; three-month U.S. Treasury bills;
90-day commercial paper; bank certificates of deposit; and Eurodollar
certificates of deposit. It is expected that Futures contracts trading in
additional financial instruments will be authorized. The standard contract
size is generally $100,000 for Futures contracts in U.S. Treasury bonds, U.S.
Treasury notes, and GNMA pass through securities and $1,000,000 for the other
designated Futures contracts. A public market exists in Futures contracts
covering a number of indexes, including, but not limited to, the Standard &
Poor's 500 Index, the Standard & Poor's 100 Index, the NASDAQ 100 Index, the
Value Line Composite Index and the New York Stock Exchange Composite Index.
Stock index futures contracts may be used to provide a hedge for a portion
of the Series' portfolio, as a cash management tool, or as an efficient way for
the Investment Manager or relevant Sub-Adviser to implement either an increase
or decrease in portfolio market exposure in response to changing market
conditions. Stock index futures contacts are currently traded with respect to
the S&P 500 Index and other broad stock market indices, such as the New York
Stock Exchange Composite Stock Index and the Value Line Composite Stock Index.
The Series may, however, purchase or sell futures contracts with respect to any
stock index. Nevertheless, to hedge the Series' portfolio successfully, the
Series must sell futures contracts with respect to indexes or subindexes whose
movements will have a significant correlation with movements in the prices of
the Series' securities.
Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the Series. In this regard, the
Series could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
The Series may enter into futures contracts which are traded on national
or foreign futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal financial futures exchanges in
the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board
of Trade. Futures exchanges and trading in the United States are regulated
under the Commodity Exchange Act by the Commodity Futures Trading Commission
("CFTC"). Futures are traded in London at the London International Financial
Futures Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock
Exchange. Although techniques other than the sale and purchase of futures
contracts could be used for the above-referenced purposes, futures contracts
offer an effective and relatively low cost means of implementing the Series'
objectives in these areas.
CERTAIN RISKS RELATING TO FUTURES CONTRACTS AND RELATED OPTIONS. There
are special risks involved in futures transactions.
VOLATILITY AND LEVERAGE. The prices of futures contracts are volatile and
are influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international policies and economic events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit

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potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage (although the Series' use of futures will not
result in leverage, as is more fully described below). As a result, 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 purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. However, the
Series would presumably have sustained comparable losses if, instead of the
futures contract, it had invested in the underlying instrument and sold it
after the decline. Furthermore, in the case of a futures contract purchase,
in order to be certain that the Series has sufficient assets to satisfy its
obligations under a futures contract, the Series earmarks to the futures
contract cash or liquid securities equal in value to the current value of the
underlying instrument less the margin deposit.
LIQUIDITY. The Series may elect to close some or all of its futures
positions at any time prior to their expiration. The Series would do so to
reduce exposure represented by long futures positions or increase exposure
represented by short futures positions. The Series may close its positions by
taking opposite positions which would operate to terminate the Series' position
in the futures contracts. Final determinations of variation margin would then
be made, additional cash would be required to be paid by or released to the
Series, and the Series would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the Series intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible to close a
futures contract, and in the event of adverse price movements, the Series would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, the Series would continue to hold the underlying instruments
subject to the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of the underlying instruments, if any,
might partially or completely offset losses on the futures contract. However,
as described below, there is no guarantee that the price of the underlying
instruments will, in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
HEDGING RISK. A decision of whether, when, and how to hedge involves
skill and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior, market or interest rate trends.
There are several risks in connection with the use by the Series of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject of
the hedge. The Investment Manager or relevant Sub-Adviser will, however,
attempt to reduce this risk by entering into futures contracts whose movements,
in its, judgment, will have a significant correlation with movements in the
prices of the Series' underlying instruments sought to be hedged.
Successful use of futures contracts by the Series for hedging purposes is
also subject to the Investment Manager or relevant Sub-Adviser's ability to
correctly predict movements in the direction of the market. It is possible
that, when the Series has sold futures to hedge its portfolio against a decline
in the market, the index, indices, or underlying instruments on which the
futures are written might advance and the value of the underlying instruments
held in the Series' portfolio might decline. If this were to occur, the Series
would lose money on the futures and also would experience a decline in value in
its underlying instruments. However, while this might occur to a certain
degree, it is believed that over time the value of the Series' portfolio will
tend to move in the same direction as the market indices which are intended to
correlate to the price movements of the underlying instruments sought to be
hedged. It is also possible that if the Series were to hedge against the
possibility of a decline in the market (adversely affecting the underlying
instruments held in its portfolio) and prices instead

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increased, the Series would lose part or all of the benefit of increased value
of those underlying instruments that it has hedged, because it would have
offsetting losses in its futures positions. In addition, in such situations, if
the Series had insufficient cash, it might have to sell underlying instruments
to meet daily variation margin requirements. Such sales of underlying
instruments might be, but would not necessarily be, at increased prices (which
would reflect the rising market). The Series might have to sell underlying
instruments at a time when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements of
futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions which could distort the normal relationship between the underlying
instruments and futures markets. Second, the margin requirements in the
futures market are less onerous than margin requirements in the securities
markets, and as a result the futures market might attract more speculators than
the securities markets do. Increased participation by speculators in the
futures market might also cause temporary price distortions. Due to the
possibility of price distortion in the futures market and also because of the
imperfect correlation between price movements in the underlying instruments and
movements in the prices of futures contracts, even a correct forecast of
general market trends by the Investment Manager or relevant Sub-Adviser might
not result in a successful hedging transaction over a very short time period.
CERTAIN RISKS OF OPTIONS ON FUTURES CONTRACTS: The Series may seek to
close out an option position by writing or buying an offsetting option covering
the same index, underlying instruments, or contract and having the same
exercise price and expiration date. The ability to establish and close out
positions on such options will be subject to the maintenance of a liquid
secondary market. Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options, or underlying instruments; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges could,
for economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in the class
or series of options) would cease to exist, although outstanding options on the
exchange that had been issued by a clearing corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms. There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities
of any of the clearing corporations inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
REGULATORY LIMITATIONS. The Series will engage in transactions in futures
contracts and options thereon only for bona fide hedging, yield enhancement and
risk management purposes, in each case in accordance with the rules and
regulations of the CFTC.
The Series may not enter into futures contracts or options thereon if,
with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits on the
Series' existing futures and premiums paid for options on futures would exceed
5% of the net asset value of the Series after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into;
provided, however, that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount may be excluded in calculating the 5%
limitation.
The Series' use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or call options thereon or the writing of put options thereon
by the Series, an amount of cash or liquid securities, equal to the market
value of the futures contracts and options thereon (less any related margin
deposits), will be identified in an account with the Series' custodian to cover
the position, or alternative cover will be employed.

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In addition, CFTC regulations may impose limitations on the Series'
ability to engage in certain yield enhancement and risk management strategies.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the Series would comply with such new
restrictions.
FOREIGN FUTURES AND OPTIONS. Participation in foreign futures and foreign
options transactions involves the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the National Futures
Association nor any domestic exchange regulates activities of any foreign
boards of trade, including the execution, delivery and clearing of
transactions, or has the power to compel enforcement of the rules of a foreign
board of trade or any applicable foreign law. This is true even if the
exchange is formally linked to a domestic market so that a position taken on
the market may be liquidated by a transaction on another market. Moreover,
such laws or regulations will vary depending on the foreign country in which
the foreign futures or foreign options transaction occurs. For these reasons,
customers who trade foreign futures or foreign options contracts may not be
afforded certain of the protective measures provided by the Commodity Exchange
Act, the CFTC's regulations and the rules of the National Futures Association
and any domestic exchange, including the right to use reparations proceedings
before the Commission and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. In particular,
funds received from the Series for foreign futures or foreign options
transactions may not be provided the same protections as funds received in
respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance in the
foreign exchange rate between the time an order is placed and the time it is
liquidated, offset or exercised.
FORWARD CURRENCY CONTRACTS AND RELATED OPTIONS. A forward foreign
currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the Contract. These contracts are principally traded in the interbank
market conducted directly between currency traders (usually large, commercial
banks) and their customers. A forward contract generally has no deposit
requirement, and no commissions are charged at any stage for trades.
Depending on the investment policies and restrictions applicable to a
Series, a Series will generally enter into forward foreign currency exchange
contracts under two circumstances. First, when a Series enters into a contract
for the purchase or sale of a security denominated in a foreign currency, it
may desire to "lock in" the U.S. dollar price of the security. By entering
into a forward contract for the purchase or sale, for a fixed amount of
dollars, of the amount of foreign currency involved in the underlying security
transactions, the Series will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar
and the subject foreign currency during the period between the date the
security is purchased or sold and the date on which payment is made or
received.
Second, when the Investment Manager or relevant Sub-Adviser believes that
the currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, including the U.S. dollar, it may enter into
a forward contract to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the Series' portfolio securities
denominated in such foreign currency. Alternatively, where appropriate, the
Series may hedge all or part of its foreign currency exposure through the use
of a basket of currencies or a proxy currency where such currencies or currency
act as an effective proxy for other currencies. In such a case, the Series may
enter into a forward contract where the amount of the foreign currency to be
sold exceeds the value of the securities denominated in such currency. The use
of this basket hedging technique may be more efficient and economical than
entering into separate forward contracts for each currency held in the Series.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
The Series will also not enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate the Series to deliver an amount of foreign currency in excess of the
value of the Series' portfolio securities or other assets denominated in that
currency. The Series, however, in order to avoid excess transactions and
transaction costs, may maintain a net exposure to forward contracts in

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

excess of the value of the Series' portfolio securities or other assets to which
the forward contracts relate (including accrued interest to the maturity of the
forward contract on such securities) provided the excess amount is "covered" by
liquid securities, denominated in any currency, at least equal at all times to
the amount of such excess. For these purposes "the securities or other assets
to which the forward contracts relate may be securities or assets denominated in
a single currency, or where proxy forwards are used, securities denominated in
more than one currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, the Investment Manager and relevant Sub-Advisers believe that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Series will be served.
At the maturity of a forward contract, the Series may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute precision
the market value of portfolio securities at the expiration of the forward
contract. Accordingly, it may be necessary for a Series to purchase additional
foreign currency on the spot market (and bear the expense of such purchase) if
the market value of the security is less than the amount of foreign currency
the Series is obligated to deliver and if a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Series is obligated to deliver. However, as noted, in
order to avoid excessive transactions and transaction costs, the Series may use
liquid securities, denominated in any currency, to cover the amount by which
the value of a forward contract exceeds the value of the securities to which it
relates.
If the Series retains the portfolio security and engages in an offsetting
transaction, the Series will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Series
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Series entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Series will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Series
will suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Series' dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Series
reserve the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Series
are not required to enter into forward contracts with regard to their foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Investment Manager or relevant Sub-Adviser. It also should be realized
that this method of hedging against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange at a future date. Additionally, although
such contracts tend to minimize the risk of loss due to a decline in the value
of the hedged currency, at the same time, they tend to limit any potential gain
which might result from an increase in the value of that currency.
Although the Series value their assets daily in terms of U.S. dollars,
they do not intend to convert their holdings of foreign currencies into U.S.
dollars on a daily basis. They will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign
currency to a Series at one rate, while offering a lesser rate of exchange
should the Series desire to resell that currency to the dealer.
PURCHASE AND SALE OF CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS. As
noted above, a currency futures contract sale creates an obligation by a
Series, as seller, to deliver the amount of currency called for in the contract
at a specified future time for a specified price. A currency futures contract
purchase creates an obligation by a Series, as purchaser, to take delivery of
an amount of currency at a specified future time at a specified price.
Although the terms of currency futures contracts specify actual delivery or
receipt, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the currency. Closing out of a

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currency futures contract is effected by entering into an offsetting purchase
or sale transaction. Unlike a currency futures contract, which requires the
parties to buy and sell currency on a set date, an option on a currency futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to enter into the
contract, the premium paid for the option is fixed at the point of sale.
SWAPS, CAPS, FLOORS AND COLLARS. Certain Series may enter into interest
rate, securities index, commodity, or security and currency exchange rate swap
agreements for any lawful purpose consistent with the Series' investment
objective, such as for the purpose of attempting to obtain or preserve a
particular desired return or spread at a lower cost to the Series than if the
Series had invested directly in an instrument that yielded that desired return
or spread. The Series also may enter into swaps in order to protect against an
increase in the price of, or the currency exchange rate applicable to,
securities that the Series anticipates purchasing at a later date. Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to several years. In a standard
"swap" transaction, two parties agree to exchange the returns (or differentials
in rates of return) earned or realized on particular predetermined investments
or instruments. The gross returns to be exchanged or "swapped" between the
parties are calculated with respect to a "notional amount," i.e., the return on
or increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of securities
representing a particular index. Swap agreements may include interest rate
caps, under which, in return for a premium, one party agrees to make payments to
the other to the extent that interests rates exceed a specified rate, or "cap";
interest rate floors under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified level, or "floor"; and interest rate collars, under which a party
sells a cap and purchases a floor, or vice versa, in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels.
The "notional amount" of the swap agreement is the agreed upon basis for
calculating the obligations that the parties to a swap agreement have agreed to
exchange. Under most swap agreements entered into by the Series, the
obligations of the parties would be exchanged on a "net basis." Consequently,
the Series' obligation (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based
on the relative value of the positions held by each party to the agreement (the
"net amount"). The Series' obligation under a swap agreement will be accrued
daily (offset against amounts owed to the Series) and any accrued but unpaid
net amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash or liquid securities.
Whether a Series' use of swap agreements will be successful in furthering
its investment objective will depend, in part, on the Investment Manager or
relevant Sub-Adviser's ability to predict correctly whether certain types of
investments are likely to produce greater returns than other investments. Swap
agreements may be considered to be illiquid. Moreover, the Series bears the
risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counterparty.
Certain restrictions imposed on the Series by the Internal Revenue Code may
limit a Series' ability to use swap agreements. The swaps market is largely
unregulated.
The Series will enter swap agreements only with counterparties that the
Investment Manager or relevant Sub-Adviser reasonably believes are capable of
performing under the swap agreements. If there is a default by the other party
to such a transaction, the Series will have to rely on its contractual remedies
(which may be limited by bankruptcy, insolvency or similar laws) pursuant to
the agreements related to the transaction.
SPREAD TRANSACTIONS. Certain Series may purchase covered spread options
from securities dealers. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives the
Series the right to put, or sell, a security that it owns at a fixed dollar
spread or fixed yield spread in relationship to another security that the
Series does not own, but which is used as a benchmark. The risk to the Series
in purchasing covered spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition, there is no assurance
that closing transactions will be available. The purchase of spread options
will be used to protect the Series against adverse changes in prevailing credit
quality spreads, i.e., the yield spread between high quality and lower quality
securities. Such protection is only provided during the life of the spread
option.
HYBRID INSTRUMENTS. Hybrid instruments combine the elements of futures
contracts or options with those of debt, preferred equity or a depository
instrument ("Hybrid Instruments"). Often these Hybrid Instruments are

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

indexed to the price of a commodity or particular currency or a domestic or
foreign debt or equity securities index. Hybrid Instruments may take a variety
of forms, including, but not limited to, debt instruments with interest or
principal payments or redemption terms determined by reference to the value of a
currency or commodity at a future point in time, preferred stock with dividend
rates determined by reference to the value of a currency, or convertible
securities with the conversion terms related to a particular commodity. The
risks of investing in Hybrid Instruments reflect a combination of the risks from
investing in securities, futures and currencies, including volatility and lack
of liquidity. Reference is made to the discussion of futures and forward
contracts in this Statement of Additional Information for a discussion of these
risks. Further, the prices of the Hybrid Instrument and the related commodity
or currency may not move in the same direction or at the same time. Hybrid
Instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between the Series and the seller of the Hybrid Instrument,
the creditworthiness of the contract party to the transaction would be a risk
factor which the Series would have to consider. Hybrid Instruments also may not
be subject to regulation of the CFTC, which generally regulates the trading of
commodity futures by U.S. persons, the SEC, which regulates the offer and sale
of securities by and to U.S. persons, or any other governmental regulatory
authority.
LENDING OF PORTFOLIO SECURITIES. For the purpose of realizing additional
income, certain of the Series may make secured loans of Series securities
amounting to not more than 33 1/3% of its total assets. Securities loans are
made to broker/dealers, institutional investors, or other persons pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market
on a daily basis. The collateral received will consist of cash, U.S.
Government securities, letters of credit or such other collateral as may be
permitted under its investment program. While the securities are being lent,
the Series will continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities, as well as interest on the investment of
the collateral or a fee from the borrower. The Series has a right to call each
loan and obtain the securities on five business days' notice or, in connection
with securities trading on foreign markets, within such longer period of time
which coincides with the normal settlement period for purchases and sales of
such securities in such foreign markets. The Series will not have the right to
vote securities while they are being lent, but it will call a loan in
anticipation of any important vote. The risks in lending portfolio securities,
as with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.
Loans will only be made to persons deemed by the Investment Manager or
relevant Sub-Adviser to be of good standing and will not be made unless, in the
judgment of the Investment Manager or relevant Sub-Adviser, the consideration
to be earned from such loans would justify the risk.
OTHER LENDING/BORROWING. Subject to approval by the Securities and
Exchange Commission, Series N and O may make loans to, or borrow funds from,
other mutual funds or portfolios of mutual funds sponsored or advised by T.
Rowe Price or Rowe Price-Fleming International, Inc. The Series have no
intention of engaging in these practices at this time.
ZERO COUPON SECURITIES. Zero coupon securities pay no cash income and are
sold at substantial discounts from their value at maturity. When held to
maturity, their entire income, which consists of accretion of discount, comes
from the difference between the issue price and their value at maturity. Zero
coupon securities are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest (cash). Zero coupon securities which
are convertible into common stock offer the opportunity for capital
appreciation as increases (or decreases) in market value, of such securities
closely follows the movements in the market value of the underlying common
stock. Zero coupon convertible securities generally are expected to be less
volatile than the underlying common stocks, as they usually are issued with
maturities of 15 years or less and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying
principal (the "corpus") of the U.S. Treasury security. A number of securities

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firms and banks have stripped the interest coupons and receipts and then resold
them in custodial receipt programs with a number of different names, including
"Treasury Income Growth Receipts" (TIGRSTM) and Certificate of Accrual on
Treasuries (CATSTM). The underlying U.S. Treasury bonds and notes themselves
are held in book-entry form at the Federal Reserve Bank or, in the case of
bearer securities (i.e., unregistered securities which are owned ostensibly by
the bearer or holder thereof), in trust on behalf of the owners thereof.
Counsel to the underwriters of these certificates or other evidences of
ownership of the U.S. Treasury securities have stated that, for federal tax and
securities purposes, in their opinion purchasers of such certificates, such as
the Series, most likely will be deemed the beneficial holder of the underlying
U.S. Government securities.
The U. S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate
Trading of Registered Interest and Principal of Securities." Under the STRIPS
program, the Series will be able to have its beneficial ownership of zero
coupon securities recorded directly in the book-entry recordkeeping system in
lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment in the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be
sold separately. Typically, the coupons are sold separately or grouped with
other coupons with like maturity dates and sold bundled in such form.
Purchasers of stripped obligations acquire, in effect, discount obligations
that are economically identical to the zero coupon securities that the Treasury
sells itself.
WHEN-ISSUED SECURITIES. Certain Series may from time to time purchase
securities on a "when-issued" basis. At the time the Series makes the
commitment to purchase a security on a when-issued basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The Series do not believe that net asset value or income will be
adversely affected by purchase of securities on a when-issued basis. The
Series will maintain cash and marketable securities equal in value to
commitments for when-issued securities.
The price of when-issued securities, which may be expressed in yield
terms, is fixed at the time the commitment to purchase is made, but delivery
and payment for the when-issued securities take place at a later date.
Normally, the settlement date occurs within 90 days of the purchase. During
the period between purchase and settlement no payment is made by the Series to
the issuer and no interest accrues to the Series. Forward commitments involve
a risk of loss if the value of the security to be purchased declines prior to
the settlement date, which risk is in addition to the risk of decline in value
of the Series' other assets. While when-issued securities may be sold prior to
the settlement date, the Series intends to purchase such securities for the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities (MBSs), including
mortgage pass-through securities and collateralized mortgage obligations
(CMOs), include certain securities issued or guaranteed by the United States
Government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA), or Federal Home Loan Mortgage Corporation (FHLMC); securities issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. Government or one
of its agencies or instrumentalities; and securities issued by private issuers
that represent an interest in or are collateralized by mortgage loans. A
mortgage pass-through security is a pro rata interest in a pool of mortgages
where the cash flow generated from the mortgage collateral is passed through to
the security holder. CMOs are obligations fully collateralized by a portfolio
of mortgages or mortgage-related securities.
Series E, N and P may invest in securities known as "inverse floating
obligations," "residual interest bonds," and "interest-only" (IO) and
"principal-only" (PO) bonds, the market values of which will generally be more
volatile than the market values of most MBSs due to the fact that such
instruments are more sensitive to interest rate charges and to the rate of
principal prepayments than are most other MBSs. An inverse floating obligation
is a derivative adjustable rate security with interest rates that adjust or
vary inversely to changes in market interest rates. The term "residual
interest" bond is used generally to describe those instruments in collateral
pools, such

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

as CMOs, which receive excess cash flow generated by the pool once all other
bondholders and expenses have been paid. IOs and POs are created by separating
the interest and principal payments generated by a pool of mortgage-backed bonds
to create two classes of securities. Generally, one class receives interest
only payments (IO) and the other class principal only payments (PO). MBSs have
been referred to as "derivatives" because the performance of MBSs is dependent
upon and derived from underlying securities.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. Prepayment risk reflects the chance that borrowers may prepay
their mortgages faster than expected, thereby affecting the investment's
average life and perhaps its yield. Borrowers are most likely to exercise
their prepayment options at a time when it is least advantageous to investors,
generally prepaying mortgages as interest rates fall, and slowing payments as
interest rates rise. Certain classes of CMOs may have priority over others
with respect to the receipt of prepayments on the mortgages and the Series may
invest in CMOs which are subject to greater risk of prepayment. Market risk
reflects the chance that the price of the security may fluctuate over time.
The price of MBSs may be particularly sensitive to prevailing interest rates,
the length of time the security is expected to be outstanding and the liquidity
of the issue. In a period of unstable interest rates, there may be decreased
demand for certain types of MBSs, and a Series invested in such securities
wishing to sell them may find it difficult to find a buyer, which may in turn
decrease the price at which they may be sold. IOs and POs are acutely sensitive
to interest rate changes and to the rate of principal prepayments. They are
very volatile in price and may have lower liquidity than most mortgage-backed
securities. Certain CMOs may also exhibit these qualities, especially those
which pay variable rates of interest which adjust inversely with and more
rapidly than short-term interest rates. Credit risk reflects the chance that
the Fund may not receive all or part of its principal because the issuer or
credit enhancer has defaulted on its obligations. Obligations issued by U.S.
Government-related entities are guaranteed by the agency or instrumentality, and
some, such as GNMA certificates, 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 Treasury; others, such as those of the FNMA, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, are supported only by the credit of the
instrumentality. Although securities issued by U.S. Government-related agencies
are guaranteed by the U.S. Government, its agencies or instrumentalities, shares
of the Series are not so guaranteed in any way. The performance of private
label MBSs, issued by private institutions, is based on the financial health of
those institutions. There is no guarantee the Series' investment in MBSs will be
successful, and the Series' total return could be adversely affected as a
result.
ASSET-BACKED SECURITIES: Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables. Payments of principal and interest may be guaranteed
up to certain amounts and for a certain time period by a letter of credit
issued by a financial institution unaffiliated with the entities issuing the
securities. Asset-backed securities may be classified as pass-through
certificates or collateralized obligations.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and
interest received to be passed through to their holders, usually after
deduction for certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest in the
underlying assets, the holders thereof bear directly the risk of any defaults
by the obligors on the underlying assets not covered by any credit support.
See "Types of Credit Support."
Asset-backed securities issued in the form of debt instruments, also known
as collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card or automobile
receivables. The assets collateralizing such asset-backed securities are
pledged to a trustee or custodian for the benefit of the holders thereof. Such
issuers generally hold no assets other than those underlying the asset-backed
securities and any credit support provided. As a result, although payments on
such asset-backed securities are obligations of the issuers, in the event of
defaults on the underlying assets not covered by any credit support (see "Types
of Credit Support"), the issuing entities are unlikely to have sufficient
assets to satisfy their obligations on the related asset-backed securities.
METHODS OF ALLOCATING CASH FLOWS. While many asset-backed securities are
issued with only one class of security, many asset-backed securities are issued
in more than one class, each with different payment terms.

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

Multiple class asset-backed securities are issued for two main reasons. First,
multiple classes may be used as a method of providing credit support. This is
accomplished typically through creation of one or more classes whose right to
payments on the asset-backed security is made subordinate to the right to such
payments of the remaining class or classes. See "Types of Credit Support".
Second, multiple classes may permit the issuance of securities with payment
terms, interest rates or other characteristics differing both from those of each
other and from those of the underlying assets. Examples include so-called
"strips" (asset-backed securities entitling the holder to disproportionate
interests with respect to the allocation of interest and principal of the assets
backing the security), and securities with a class or classes having
characteristics which mimic the characteristics of non-asset-backed securities,
such as floating interest rates (i.e., interest rates which adjust as a
specified benchmark changes) or scheduled amortization of principal.
Asset-backed securities in which the payment streams on the underlying
assets are allocated in a manner different than those described above may be
issued in the future. The Series may invest in such asset-backed securities if
such investment is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the Series.
TYPES OF CREDIT SUPPORT. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
To lessen the effect of failures by obligors on underlying assets to make
payments, such securities may contain elements of credit support. Such credit
support falls into two classes: liquidity protection and protection against
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that scheduled payments on the underlying pool are
made in a timely fashion. Protection against ultimate default ensures ultimate
payment of the obligations on at least a portion of the assets in the pool.
Such protection may be provided through guarantees, insurance policies or
letters of credit obtained from third parties, through various means of
structuring the transaction or through a combination of such approaches.
Examples of asset-backed securities with credit support arising out of the
structure of the transaction include "senior-subordinated securities" (multiple
class asset-backed securities with certain classes subordinate to other classes
as to the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class) and
asset-backed securities that have "reserve Portfolios" (where cash or
investments, sometimes funded from a portion of the initial payments on the
underlying assets, are held in reserve against future losses) or that have been
"over collateralized" (where the scheduled payments on, or the principal amount
of, the underlying assets substantially exceeds that required to make payment
of the asset-backed securities and pay any servicing or other fees). The
degree of credit support provided on each issue is based generally on
historical information respecting the level of credit risk associated with such
payments. Delinquency or loss in excess of that anticipated could adversely
affect the return on an investment in an asset-backed security. Additionally,
if the letter of credit is exhausted, holders of asset-backed securities may
also experience delays in payments or losses if the full amounts due on
underlying sales contracts are not realized.
AUTOMOBILE RECEIVABLE SECURITIES. Asset-Backed Securities may be backed
by receivables from motor vehicle installment sales contracts or installment
loans secured by motor vehicles ("Automobile Receivable Securities"). Since
installment sales contracts for motor vehicles or installment loans related
thereto ("Automobile Contracts") typically have shorter durations and lower
incidences of prepayment, Automobile Receivable Securities generally will
exhibit a shorter average life and are less susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in violation of
its obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also although most Automobile Contracts
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to create an enforceable security interest against competing claims of
other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually is not amended
to reflect the assignment of the seller's security interest for the benefit of
the holders of the Automobile Receivable

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

Securities. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on the
securities. In addition, various state and federal securities laws give the
motor vehicle owner the right to assert against the holder of the owner's
Automobile Contract certain defenses such owner would have against the seller of
the motor vehicle. The assertion of such defenses could reduce payments on the
Automobile Receivable Securities.
CREDIT CARD RECEIVABLE SECURITIES. Asset-Backed Securities may be backed
by receivables from revolving credit card agreements ("Credit Card Receivable
Securities"). Credit balances on revolving credit card agreements ("Accounts")
are generally paid down more rapidly than are Automobile Contracts. Most of
the Credit Card Receivable Securities issued publicly to date have been
Pass-Through Certificates. In order to lengthen the maturity of Credit Card
Receivable Securities, most such securities provide for a fixed period during
which only interest payments on the underlying Accounts are passed through to
the security holder and principal payments received on such Accounts are used
to fund the transfer to the pool of assets supporting the related Credit Card
Receivable Securities of additional credit card charges made on an Account.
The initial fixed period usually may be shortened upon the occurrence of
specified events which signal a potential deterioration in the quality of the
assets backing the security, such as the imposition of a cap on interest rates.
The ability of the issuer to extend the life of an issue of Credit Card
Receivable Securities thus depends upon the continued generation of additional
principal amounts in the underlying accounts during the initial period and the
non-occurrence of specified events. An acceleration in cardholders' payment
rates or any other event which shortens the period during which additional
credit card charges on an Account may be transferred to the pool of assets
supporting the related Credit Card Receivable Security could shorten the
weighted average life and yield of the Credit Card Receivable Security.
Credit cardholders are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such holders the right to set
off certain amounts against balances owed on the credit card, thereby reducing
amounts paid on Accounts. In addition, unlike most other Asset Backed
Securities, Accounts are unsecured obligations of the cardholder.
RESTRICTED SECURITIES. Restricted securities may be sold only in
privately negotiated transactions or in a public offering with respect to which
a registration statement is in effect under the Securities Act of 1933 (the
"1933 Act"). Where registration is required, the Series may be obligated to
pay all or part of the registration expenses and a considerable period may
elapse between the time of the decision to sell and the time the Series may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Series
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair value as determined in accordance
with procedures prescribed by the Board of Directors. If through the
appreciation of restricted securities or the depreciation of unrestricted
securities or the depreciation of liquid securities, the Series should be in a
position where more than the percentage of its net assets permitted under the
respective Series operating policy are invested in illiquid assets, including
restricted securities, the Series will take appropriate steps to protect
liquidity.
The Series may purchase securities which while privately placed, are
eligible for purchase and sale under Rule 144A under the 1933 Act. This rule
permits certain qualified institutional buyers, such as the Series, to trade in
privately placed securities even though such securities are not registered
under the 1933 Act. The Investment Manager or relevant Sub-Adviser, under the
supervision of the Fund's Board of Directors, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Series'
restriction on investment of its assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not is a question of
fact. In making this determination, the Investment Manager or relevant
Sub-Adviser will consider the trading markets for the specific security taking
into account the unregistered nature of a Rule 144A security. In addition the
Investment Manager or relevant Sub-Adviser could consider the (1) frequency of
trades and quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, and (4) the nature of the security and of
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A securities would be monitored, and if as a result of changed
conditions it is determined that a Rule 144A security is no longer liquid, the
Series' holdings of illiquid securities would be reviewed to determine what, if
any, steps are required to assure that the Series does not invest more than
permitted in illiquid securities. Investing in Rule 144A securities could have
the effect of increasing the

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

amount of the Series' assets invested in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.
WARRANTS. Investment in warrants is pure speculation in that they have no
voting rights, pay no dividends, and have no rights with respect to the assets
of the corporation issuing them. Warrants basically are options to purchase
equity securities at a specific price valid for a specific period of time.
They do not represent ownership of the securities but only the right to buy
them. Warrants differ from call options in that warrants are issued by the
issuer of the security which may be purchased on their exercise, whereas call
options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.

CERTAIN RISKS OF FOREIGN INVESTING

BRADY BONDS. Certain Series may invest in "Brady Bonds," which are debt
restructurings that provide for the exchange of cash and loans for newly issued
bonds. Brady Bonds are securities created through the exchange of
existing commercial bank loans to public and private entities in certain
emerging markets for new bonds in connection with debt restructuring under a
debt restructuring plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady. Brady Bonds recently have been issued by the governments of
Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic, Jordan, Mexico,
Nigeria, The Philippines, Uruguay, Venezuela, Ecuador and Poland.
Approximately $150 billion in principal amount of Brady Bonds has been issued
to date, the largest proportion having been issued by Mexico and Venezuela.
Investors should recognize that Brady Bonds have been issued only recently and,
accordingly, do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the secondary market for Latin
American debt. The Salomon Brothers Brady Bond Index provides a benchmark that
can be used to compare returns of emerging market Brady Bonds with returns in
other bond markets, e.g., the U.S. bond market.
Series K may invest in either collateralized or uncollateralized Brady
Bonds denominated in various currencies, while Series B and Series P may invest
only in collateralized bonds denominated in U.S. dollars. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at the time and is adjusted at regular
intervals thereafter.
EMERGING COUNTRIES. Certain Series may invest in debt securities in
emerging markets. Investing in securities in emerging countries may entail
greater risks than investing in debt securities in developed countries. These
risks include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict a
Series' investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; and (v) the absence of developed structures governing private or
foreign investment or allowing for judicial redress for injury to private
property.
POLITICAL AND ECONOMIC RISKS. Investing in securities of non-U.S.
companies may entail additional risks due to the potential political and
economic instability of certain countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation by any country, a Series
could lose its entire investment in any such country.
An investment in a Series which invests in non-U.S. companies is subject
to the political and economic risks associated with investments in emerging
markets. Even though opportunities for investment may exist in emerging
markets, any change in the leadership or policies of the governments of those
countries or in the leadership or policies of any other government which
exercises a significant influence over those countries, may halt the expansion
of or reverse the liberalization of foreign investment policies now occurring
and thereby eliminate any investment opportunities which may currently exist.

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of emerging market countries previously
expropriated large quantities of real and personal property similar to the
property which will be represented by the securities purchased by the Series.
The claims of property owners against those governments were never finally
settled. There can be no assurance that any property represented by securities
purchased by a Series will not also be expropriated, nationalized, or otherwise
confiscated. If such confiscation were to occur, the Series could lose a
substantial portion of its investments in such countries. The Series'
investments would similarly be adversely affected by exchange control
regulation in any of those countries.
RELIGIOUS AND ETHNIC INSTABILITY. Certain countries in which a Series may
invest may have vocal minorities that advocate radical religious or
revolutionary philosophies or support ethnic independence. Any disturbance on
the part of such individuals could carry the potential for wide-spread
destruction or confiscation of property owned by individuals and entities
foreign to such country and could cause the loss of the Series' investment in
those countries.
FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Series. As
illustrations, certain countries require governmental approval prior to
investments by foreign persons, or limit the amount of investment by foreign
persons in a particular company, or limit the investments by foreign persons to
only a specific class of securities of a company that may have less
advantageous terms than securities of the company available for purchase by
nationals. Moreover, the national policies of certain countries may restrict
investment opportunities in issuers or industries deemed sensitive to national
interests. In addition, some countries require governmental approval for the
repatriation of investment income, capital or the proceeds of securities sales
by foreign investors. A Series could be adversely affected by delays in, or a
refusal to grant, any required governmental approval for repatriation, as well
as by the application to it of other restrictions on investments.
NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION.
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those
applicable to U.S. companies. In particular, the assets, liabilities and
profits appearing on the financial statements of such a company may not reflect
its financial position or results of operations in the way they would be
reflected had such financial statements been prepared in accordance with U.S.
generally accepted accounting principles. Most of the securities held by the
Series will not be registered with the SEC or regulators of any foreign
country, nor will the issuers thereof be subject to the SEC's reporting
requirements. Thus, there will be less available information concerning
foreign issuers of securities held by the Series than is available concerning
U.S. issuers. In instances where the financial statements of an issuer are not
deemed to reflect accurately the financial situation of the issuer, the
Investment Manager and relevant Sub-Adviser will take appropriate steps to
evaluate the proposed investment, which may include on-site inspection of the
issuer, interviews with its management and consultations with accountants,
bankers and other specialists. There is substantially less publicly available
information about foreign companies than there are reports and ratings
published about U.S. companies and the U.S. Government. In addition, where
public information is available, it may be less reliable than such information
regarding U.S. issuers.
CURRENCY FLUCTUATIONS. Because a Series, under normal circumstances, may
invest substantial portions of its total assets in the securities of foreign
issuers which are denominated in foreign currencies, the strength or weakness
of the U.S. dollar against such foreign currencies will account for part of the
Series' investment performance. A decline in the value of any particular
currency against the U.S. dollar will cause a decline in the U.S. dollar value
of the Series' holdings of securities denominated in such currency and,
therefore, will cause an overall decline in the Series' net asset value and any
net investment income and capital gains to be distributed in U.S. dollars to
shareholders of the Series.
The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the movement
of interest rates, the pace of business activity in certain other countries and
the U.S., and other economic and financial conditions affecting the world
economy.

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

Although the Series values its assets daily in terms of U.S. dollars, the
Series does not intend to convert holdings of foreign currencies into U.S.
dollars on a daily basis. The Series will do so from time to time, and
investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference ("spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Series at one rate, while offering a lesser rate of
exchange should the Series desire to sell that currency to the dealer.
ADVERSE MARKET CHARACTERISTICS. Securities of many foreign issuers may be
less liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers generally are
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions usually are subject to fixed
commissions, which generally are higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the
Series are uninvested and no return is earned thereon. The inability of the
Series to make intended security purchases due to settlement problems could
cause it to miss attractive opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to the Series
due to subsequent declines in value of the portfolio security or, if the Series
has entered into a contract to sell the security, could result in possible
liability to the purchaser. The Investment Manager or relevant Sub-Adviser
will consider such difficulties when determining the allocation of the Series'
assets.
NON-U.S. WITHHOLDING TAXES. A Series' investment income and gains from
foreign issuers may be subject to non-U.S. withholding and other taxes, thereby
reducing the Series' investment income and gains.
INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may at times limit or preclude investment
in certain of such countries and may increase the costs and expenses of a
Series. Investments by foreign investors are subject to a variety of
restrictions in many developing countries. These restrictions may take the
form of prior governmental approval, limits on the amount or type of securities
held by foreigners, and limits on the types of companies in which foreigners
may invest. Additional or different restrictions may be imposed at any time by
these or other countries in which a Series invests. In addition, the
repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including in
some cases the need for certain government consents. These restrictions may in
the future make it undesirable to invest in these countries.
MARKET CHARACTERISTICS. Foreign securities may be purchased in
over-the-counter markets or on stock exchanges located in the countries in
which the respective principal offices of the issuers of the various securities
are located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as, and may be more volatile than,
those in the United States. While growing in volume, they usually have
substantially less volume than U.S. markets and a Series' portfolio securities
may be less liquid and more volatile than securities of comparable U.S.
companies. Equity securities may trade at price/earnings multiples higher than
comparable United States securities and such levels may not be sustainable.
Fixed commissions on foreign stock exchanges are generally higher than
negotiated commissions on United States exchanges, although a Series will
endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
foreign stock exchanges, brokers and listed companies than in the United
States. Moreover, settlement practices for transactions in foreign markets may
differ from those in United States markets, and may include delays beyond
periods customary in the United States.
INFORMATION AND SUPERVISION. There is generally less publicly available
information about foreign companies comparable to reports and ratings that are
published about companies in the United States. Foreign companies are also
generally not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies.
COSTS. Investors should understand that the expense ratio of the Series
that invest in foreign securities can be expected to be higher than investment
companies investing in domestic securities since the cost of maintaining the
custody of foreign securities and the rate of advisory fees paid by the Series
are higher.
OTHER. With respect to certain foreign countries, especially developing
and emerging ones, there is the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory

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INVESTMENT METHODS AND RISK FACTORS (CONTINUED)

taxation, limitations on the removal of funds or other assets of the Series,
political or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.

EASTERN EUROPE. Changes occurring in Eastern Europe and Russia today
could have long-term potential consequences. As restrictions fail, this could
result in rising standards of living, lower manufacturing costs, growing
consumer spending, and substantial economic growth. However, investment in the
countries of Eastern Europe and Russia is highly speculative at this time.
Political and economic reforms are too recent to establish a definite trend
away from centrally-planned economies and state owned industries. In many of
the countries of Eastern Europe and Russia, there is no stock exchange or
formal market for securities. Such countries may also have government exchange
controls, currencies with no recognizable market value relative to the
established currencies of western market economies, little or no experience in
trading in securities, no financial reporting standards, a lack of a banking
and securities infrastructure to handle such trading, and a legal tradition
which does not recognize rights in private property. In addition, these
countries may have national policies which restrict investments in companies
deemed sensitive to the country's national interest. Further, the governments
in such countries may require governmental or quasi-governmental authorities to
act as custodian of the Series' assets invested in such countries and these
authorities may not qualify as a foreign custodian under the Investment
Company Act of 1940 and exemptive relief from such Act may be required. All of
these considerations are among the factors which could cause significant risks
and uncertainties to investment in Eastern Europe and Russia.

INVESTMENT POLICY LIMITATIONS

The Series operate within certain investment limitations which cannot be
changed without the approval of the holders of a majority of the outstanding
shares of the respective Series. Pursuant thereto, none of the Series will:

1. Purchase a security if, as a result, with respect to 75% of the value of
its total assets, more than 5% of the value of its total assets would be
invested in the securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities).
2. Purchase more than 10% of the outstanding voting securities of any one
issuer.
3. Purchase securities for the purpose of exercising control over the issuers
thereof.
4. Underwrite securities of other issuers.
5. Borrow money or securities for any purposes except that borrowing up to 5%
of the Fund's total assets from commercial banks is permitted for
emergency or temporary purposes; provided, however, that this investment
limitation does not apply to Series K, M, N, O, P, V and X which may
borrow up to 33 1/3% of total assets. The Fund may also obtain such
short-term credits as are necessary for the clearance of portfolio
transactions.
6. Make loans to other persons, except by entry into repurchase agreements or
by the purchase, upon original issuance or otherwise, of a portion of an
issue of publicly distributed bonds, notes, debentures or other
securities; provided, however, that this investment limitation does not
apply to Series K, M, N, O, P, V or X.
7. Effect short sales of securities or buy securities on margin (except such
short-term credits as are necessary for the clearance of portfolio
transactions); provided, however, that this limitation does not apply to
Series K, M, N, O, P, V or X.
8. Invest in the securities of other investment companies; provided, however,
that this investment limitation does not apply to Series K, M, N, O, P, V
or X.
9. Concentrate investments in particular industries or make an investment in
any one industry if, when added to its other investments, total
investments in the same industry then held by the Series would exceed 25%
of the value of its assets.
10. Purchase or sell interests in real estate except as are represented by
securities of companies, including real estate trusts whose assets consist
substantially of interests in real estate, including obligations secured
by real estate or interests therein and which therefore may represent
indirect interest in real estate.
11. Own, buy, sell or otherwise deal in commodities or commodities contracts;
provided, however, that Series K, M, N, O, P, V and X may enter into
forward currency contracts and other forward commitments and transactions
in futures, options and options on futures.
12. Issue senior securities, except as permitted under the Investment Company
Act of 1940.

50
<PAGE>

The following notes should be read in connection with the above-described
fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions 7 and 11, the Fund does not
interpret these restrictions as prohibiting transactions in currency contracts,
hybrid instruments, options, financial futures contracts or options on
financial futures contracts or from investing in securities or other
instruments backed by physical commodities.
For purposes of investment restriction 9, U.S., state or local
governments, or related agencies or instrumentalities, are not considered an
industry. Industries are determined by reference to the classifications of
industries set forth in the Series' semiannual and annual reports.
For purposes of investment restriction 6, the Series will consider the
acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
The following investment policies of Series K are not fundamental policies
and may be changed by a vote of a majority of the Series' Board of Directors
without shareholder approval. Series K may purchase and sell futures contracts
and related options under the following conditions: (a) the then current
aggregate futures market prices of financial instruments required to be
delivered and purchased under open futures contracts shall not exceed 30% of
the Series' total assets, at market value; and (b) no more than 5% of the
Series' total assets, at market value at the time of entering into a contract,
shall be committed to margin deposits in relation to futures contracts.
As a matter of operating policy, Series O may not:

1. Purchase additional securities when money borrowed exceeds 5% of its total
assets;
2. Purchase a futures contract or an option thereon if, with respect to
positions in futures or options on futures which do not represent bona
fide hedging, the aggregate initial margin and premiums on such options
would exceed 5% of the Series' net asset value;
3. Purchase illiquid securities and securities of unseasoned issuers if, as a
result, more than 15% of its net assets would be invested in such
securities, provided that the Series will not invest more than 10% of its
total assets in restricted securities and not more than 5% in securities
of unseasoned issuers. Securities eligible for resale under Rule 144A of
the Securities Act of 1933 are not included in the 10% limitation but are
subject to the 15% limitation;
4. Purchase securities of open-end or closed-end investment companies except
in compliance with the Investment Company Act of 1940 and applicable state
law. Duplicate fees may result from such purchases;
5. Purchase securities on margin except (i) for use of short-term credit
necessary for clearance of purchases of portfolio securities and (ii) it
may make margin deposits in connection with futures contracts or other
permissible investments;
6. Mortgage, pledge, hypothecate or, in any manner, transfer any security
owned by the Series as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and
then such mortgaging, pledging or hypothecating may not exceed 33 1/3% of
the Series' total assets at the time of borrowing or investment;
7. Purchase participations or other direct interests in or enter into leases
with respect to, oil, gas, or other mineral exploration or development
programs;
8. Invest in puts, calls, straddles, spreads, or any combination thereof,
except to the extent permitted by the Prospectus and Statement of
Additional Information;
9. Purchase or retain the securities of any issuer if those officers and
directors of the Series, and of its investment manager, who each owns
beneficially more than .5% of the outstanding securities of such issuer,
together own beneficially more than 5% of such securities;
10. Effect short sales of securities;
11. Purchase a security (other than obligations issued or guaranteed by the
U.S., any foreign, state or local government, their agencies or
instrumentalities) if, as a result, more than 5% of the value of the
Series' total assets would be invested in the securities of issuers which
at the time of purchase had been in operation for less than three years
(for this purpose, the period of operation of any issuer shall include the
period of operation of any predecessor or unconditional guarantor of such
issuer). This restriction does not apply to securities of pooled
investment vehicles or mortgage or asset-backed securities; or
12. Invest in warrants if, as a result thereof, more than 2% of the value of
the net assets of the Series would be invested in warrants which are not
listed on the New York Stock Exchange, the American Stock Exchange, or a
recognized foreign exchange, or more than 5% of the value of the net
assets of the Series would be

51
<PAGE>

invested in warrants whether or not so listed. For purposes of these
percentage limitations, the warrants will be valued at the lower of cost
or market and warrants acquired by the Series in units or attached to
securities may be deemed to be without value.

OFFICERS AND DIRECTORS

The directors and officers of the Fund and their principal occupations for
at least the last five years are as follows. Unless otherwise noted, the
address of each officer and director is 700 Harrison Street, Topeka, Kansas
66636-0001.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------
<S> <C>
JOHN D. CLELAND,* President and Director Senior Vice President and Managing Member
Representative, Security Management
Company, LLC; Senior Vice President,
Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.

DONALD A. CHUBB, JR.,** Director Business broker, Griffith & Blair Realtors.
2222 SW 29th Street Prior to 1997, President, Neon Tube Light
Topeka, Kansas 66611 Company, Inc.

DONALD L. HARDESTY, Director President, Central Research Corporation.
900 Bank IV Tower
Topeka, Kansas 66603

PENNY A. LUMPKIN,** Director Vice President, Palmer News, Inc. Prior to
3616 Canterbury Town Road October 1991, Secretary and Director,
Topeka, Kansas 66610 Palmer Companies, Inc. (Wholesale Periodicals).

MARK L. MORRIS, JR.,** Director President, Mark Morris Associates
5500 SW 7th Street (Veterinary Research and Education).
Topeka, Kansas 66606

HUGH L. THOMPSON, Director President Emeritus, Washburn University.
2728 Newfound Harbour Drive Prior to June 1997, President, Washburn
Merritt Island, Florida 32952 University.

JAMES R. SCHMANK, Vice President and Treasurer Senior Vice President, Treasurer, Chief
Fiscal Officer and Managing Member
Representative, Security Management
Company, LLC; Vice President, Security
Benefit Group, Inc. and Security Benefit
Life Insurance Company.

MARK E. YOUNG, Vice President Vice President, Security Management
Company, LLC; Assistant Vice President,
Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.

JANE A. TEDDER, Vice President Vice President and Senior Economist,
Security Management Company, LLC; Vice
President, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company.

TERRY A. MILBERGER, Vice President Senior Vice President and Senior Portfolio
Manager, Security Management Company, LLC;
Senior Vice President, Security Benefit
Group, Inc. and Security Benefit Life
Insurance Company.

AMY J. LEE, Secretary Secretary, Security Management Company,
LLC; Vice President, Associate General
Counsel and Assistant Secretary, Security
Benefit Group, Inc. and Security Benefit
Life Insurance Company.

BRENDA M. HARWOOD, Assistant Treasurer and Assistant Vice President, Assistant
Assistant Secretary Treasurer and Assistant Secretary, Security
Management Company, LLC; Assistant Vice
President, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company.
- --------------------------------------------------------------------------------------------------
</TABLE>

52
<PAGE>

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------
<S> <C>
CINDY L. SHIELDS, Assistant Vice President Assistant Vice President and Portfolio
Manager, Security Management Company, LLC;
Assistant Vice President, Security Benefit
Group, Inc. and Security Benefit Life
Insurance Company. Prior to August 1994,
Junior Portfolio Manager, Research Analyst,
Junior Research Analyst and Portfolio
Assistant, Security Management Company.

THOMAS A. SWANK, Assistant Vice President Vice President and Portfolio Manager,
Security Management Company, LLC; Vice
President, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company.

STEVEN M. BOWSER, Assistant Vice President Second Vice President and Portfolio
Manager, Security Management Company, LLC;
Second Vice President, Security Benefit
Life Insurance Company and Security Benefit
Group, Inc. Prior to October 1992,
Assistant Vice President and Portfolio
Manager, Federal Home Loan Bank.

BARBARA J. DAVISON, Assistant Vice President Compliance Officer, Assistant Vice
President and Portfolio Manager, Security
Management Company, LLC; Assistant Vice
President, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company.
Prior to 1996, Assistant Vice
President-Operations, Security Benefit Life
Insurance Company.

JIM P. SCHIER, Assistant Vice President Assistant Vice President and Portfolio
Manager, Security Management Company, LLC,
Security Benefit Group, Inc. and Security
Benefit Life Insurance Company. Prior to
February 1997, Assistant Vice President and
Senior Research Analyst, Security
Management Company, LLC. Prior to August
1995, Portfolio Manager, Mitchell Capital
Management. Prior to March 1993, Vice
President and Portfolio Manager, Fourth
Financial.

DAVID ESHNAUR, Assistant Vice President Assistant Vice President and Portfolio
Manager, Security Management Company, LLC.
Prior to July 1997, Assistant Vice
President and Assistant Portfolio Manager,
Waddell & Reed.

CHRISTOPHER D. SWICKARD, Assistant Secretary Assistant Vice President and Assistant
Counsel, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company.
Prior to June 1992, student at Washburn
University School of Law.
- --------------------------------------------------------------------------------------------------

*These directors are deemed to be "interested persons" of the Fund under the Investment Company
Act of 1940, as amended.

**These directors serve on the Fund's audit committee, the purpose of which is to meet with the
independent auditors, to review the work of the auditors, and to oversee the handling by
Security Management Company, LLC of the accounting functions for the Fund.

- --------------------------------------------------------------------------------------------------
</TABLE>

The officers of the Fund hold identical offices in the other Funds in the
Security Group of Funds, except Ms. Tedder and Messrs. Milberger and Schier.
Ms. Tedder is also Vice President of Security Income Fund and Security Equity
Fund; Mr. Milberger is also Vice President of Security Equity Fund; Mr. Schier
is also Assistant Vice President of Security Equity Fund; Ms. Shields is also
Assistant Vice President of Security Ultra Fund and Security Equity Fund; Mr.
Bowser is also Assistant Vice President of Security Tax-Exempt Fund and
Security Income Fund; Mr. Swank is also Assistant Vice President of Security
Growth and Income Fund, Security Tax-Exempt Fund and Security Income Fund; Ms.
Davison is also Assistant Vice President of Security Cash Fund; and Mr. Eshnaur
is also Assistant Vice President of Security Equity Fund. The directors of the
Fund are also directors of each of the other Funds in the Security Group of
Funds. See the table under "Investment Management," page , for positions held
by such persons with the Investment Manager. Mr. Young and Ms. Lee hold
identical offices with Security Distributors, Inc. ("SDI"). Messrs. Cleland
and Schmank are also director and Vice President, and Ms. Harwood is Treasurer
of SDI.

<PAGE>

REMUNERATION OF DIRECTORS AND OTHERS

The Fund pays each of its directors, except those directors who are
"interested persons" of the Fund, an annual retainer of $6,250 and a fee of
$800 per meeting, plus reasonable travel costs, for each meeting of the board
attended. The Fund pays a fee of $100 per hour with a minimum fee of $200 and
reasonable travel costs for each meeting of the Fund's audit committee attended
by those directors who serve on the committee. Such fees and travel costs are
paid by the Fund pursuant to the Fund's Administrative Services Agreement dated
April 1, 1987, as amended.
The Fund does not pay any fees to, or reimburse expenses of, its Directors
who are considered "interested persons" of the Fund. The aggregate
compensation paid by the Fund to each of the Directors during its fiscal year
ended December 31, 1996, and the aggregate compensation paid to each of the
Directors during calendar year 1996 by all seven of the registered investment
companies to which the Adviser provides investment advisory services
(collectively, the "Security Fund Complex"), are set forth below. Each of the
Directors is a director of each of the other registered investment companies in
the Security Fund Complex.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL FROM THE SECURITY
NAME OF DIRECTOR COMPENSATION ACCRUED AS PART OF BENEFITS UPON FUND COMPLEX,
OF THE FUND FROM SBL FUND FUND EXPENSES RETIREMENT INCLUDING THE FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Willis A. Anton $9,250 $0 $0 $18,500
Donald A. Chubb, Jr. 9,650 0 0 18,900
John D. Cleland 0 0 0 0
Donald L. Hardesty 9,250 0 0 18,500
Penny A. Lumpkin 9,650 0 0 18,900
Mark L. Morris, Jr. 9,650 0 0 18,900
Jeffrey B. Pantages 0 0 0 0
Harold G. Worswick* 0 0 0 0
Hugh L. Thompson 7,088 0 0 14,175
- --------------------------------------------------------------------------------------------------
*The Fund has accrued deferred compensation in the amount of $3,225 for Mr. Worswick for the
calendar year ended December 31, 1996.
- --------------------------------------------------------------------------------------------------
</TABLE>

Security Management Company, LLC compensates its officers and directors
who may also serve as officers or directors of the Fund. On October 1, 1997,
the Fund's officers and directors (as a group) beneficially owned less than 1%
of the outstanding shares of the Fund.

SALE AND REDEMPTION OF SHARES

Shares of the Fund are sold and redeemed at their net asset value next
determined after receipt of a purchase or redemption order. No sales or
redemption charge is made. The value of shares redeemed may be more or less
than the shareholder's cost, depending upon the market value of the portfolio
securities at the time of redemption. Payment for shares redeemed will be made
as soon as practicable after receipt, but in no event later than seven days
after tender, except that the Fund may suspend the right of redemption during
any period when trading on the New York Stock Exchange is restricted or such
Exchange is closed for other than weekends or holidays, or any emergency is
deemed to exist by the Securities and Exchange Commission.

INVESTMENT MANAGEMENT

Security Management Company, LLC (the "Investment Manager"), 700 Harrison
Street, Topeka, Kansas, serves as investment adviser to the Fund. The
Investment Manager also acts as investment adviser to the following mutual
funds: Security Equity Fund, Security Growth and Income Fund, Security Ultra
Fund, Security Income Fund, Security Cash Fund, and Security Tax-Exempt Fund.
The Investment Manager is controlled by its members, Security Benefit Life
Insurance Company and Security Benefit Group, Inc. ("SBG"). SBG is an
insurance and financial services holding company wholly-owned by Security
Benefit Life Insurance Company, 700 Harrison Street, Topeka, Kansas 66636-0001.
Security Benefit Life, a mutual life insurance company, is incorporated under
the laws of Kansas.
The Investment Manager serves as investment adviser to the Fund under an
Investment Advisory Contract dated June 20, 1977, which was renewed by the
board of directors of the Fund at a regular meeting held on

54
<PAGE>

February 7, 1997. The contract may be terminated without penalty at any time by
either party on 60 days' written notice and is automatically terminated in the
event of its assignment.
Pursuant to the Investment Advisory Contract, the Investment Manager
furnishes investment advisory, statistical and research facilities, supervises
and arranges for the purchase and sale of securities on behalf of the Fund, and
provides for the compilation and maintenance of records pertaining to the
investment advisory function. For such services, the Investment Manager is
entitled to receive compensation on an annual basis equal to .75% of the average
net assets of Series A, Series B, Series E, Series S, Series J, Series K, Series
P and Series V; .5% of the average net assets of Series C; and 1.00% of the
average net assets of Series D, Series M, Series N, Series O and Series X,
computed on a daily basis and payable monthly. During the last three fiscal
years, SBL Fund paid the following amounts to the Investment Manager for its
services: 1996 - $17,145,558; 1995 - $12,436,327; and 1994 - $10,141,578. For
the period May 1, 1997 (date of inception) to August 31, 1997, the Investment
Manager waived its entire advisory fee for Series V in the amount of $3,515.
For the fiscal year ended December 31, 1996 and the fiscal year ending December
31, 1997, the Investment Manager agreed to waive the investment advisory fees of
Series K and P. The Investment Manager also agreed to waive the investment
advisory fees of Series V and Series X for the fiscal year ending December 31,
1997.
The Investment Manager has retained Lexington Management Corporation
("Lexington"), Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663, to
furnish certain investment advisory services to Series D and K of the Fund
pursuant to Sub-Advisory Agreements, dated April 26, 1991, and May 1, 1995,
respectively. Pursuant to the agreements, Lexington furnishes investment
advisory, statistical and research facilities, supervises and arranges for the
purchase and sale of securities on behalf of Series D and K and provides for
the compilation and maintenance of records pertaining to such investment
advisory services, subject to the control and supervision of the Board of
Directors of the Fund and the Investment Manager. For such services, the
Investment Manager pays Lexington an amount equal to .50% of the average net
assets of Series D, and .35% of the average net assets of Series K, computed on
a daily basis and payable monthly. The Lexington Sub-Advisory Agreements may
be terminated without penalty at any time by either party on 60 days' written
notice and are automatically terminated in the event of assignment or in the
event that the Investment Advisory Contract between the Investment Manager and
the Fund is terminated, assigned or not renewed.
Lexington is a wholly-owned subsidiary of Lexington Global Asset Managers,
Inc., a Delaware corporation with offices at Park 80 West, Plaza Two, Saddle
Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their
spouses, trusts and other related entities have a majority voting control of
the outstanding shares of Lexington Global Asset Managers, Inc. Lexington
which was established in 1938 currently serves as investment adviser,
sub-adviser and/or sponsor to 21 investment companies with varying objectives
and manages over $3.8 billion in assets.
Lexington has entered into a sub-advisory contract with MFR Advisors, Inc.
("MFR"), One Liberty Plaza, New York, New York 10006, to provide investment and
economic research services to Series K, subject to the control and supervision
of the Board of Directors of SBL Fund For such services, Lexington pays MFR an
amount equal to .15% of the average net assets of Series K, computed on a daily
basis and payable monthly.
MFR is a subsidiary of Maria Fiorini Ramirez, Inc. ("Ramirez") which was
established in August of 1992 to provide global economic consulting, investment
advisory and broker/dealer services. Ramirez owns 80% and Security Benefit
Group, Inc. ("SBG") owns 20% of the outstanding common stock of MFR. Maria
Fiorini Ramirez owns 100% of the outstanding capital stock of Ramirez, and
Security Benefit Life Insurance Company owns 100% of the outstanding common
stock of SBG. MFR currently acts as investment adviser to the Global High
Yield Fund (formerly Global Aggressive Bond Fund), Global Asset Allocation Fund
and Emerging Markets Total Return Fund, as sub-adviser to the Lexington Ramirez
Global Income Fund, and also serves as an institutional manager for private
clients.
The Investment Manager has entered into a sub-advisory agreement with
Meridian Investment Management Corporation ("Meridian"), 12835 East Arapahoe
Road, Tower II, 7th Floor, Englewood, Colorado 80112. Pursuant to the agreement,
Meridian furnishes investment advisory, statistical and research facilities,
supervises and arranges for the purchase and sale of equity securities on behalf
of Series X and provides for the compilation and maintenance of records
pertaining to such investment advisory services, subject to the control and
supervision of the Board of Directors of the Fund and the Investment Manager.
Meridian is a wholly-owned subsidiary of Meridian Management and Research
Corporation which is controlled by its two stockholders, Michael J. Hart and

55
<PAGE>

Craig T. Callahan. The Investment Manager pays Meridian an annual fee equal to a
percentage of the average daily closing value of the net assets of Series M,
computed on a daily basis according to the following schedule:

Average Daily Net Assets of the Series Annual Fee
-------------------------------------- ----------
Less than $100 million...................... .40%, plus
$100 million but less than $200 million..... .35%, plus
$200 million but less than $400 million..... .30%, plus
$400 million or more........................ .25%

The Investment Manager has engaged T. Rowe Price Associates, Inc. ("T.
Rowe Price"), 100 East Pratt Street, Baltimore, Maryland 21202, organized in
1937 under the laws of the State of Maryland by the late Thomas Rowe Price,
Jr., to provide investment advisory services to Series N and O. Pursuant to
the agreements, T. Rowe Price furnishes investment advisory services,
supervises and arranges for the purchase and sale of securities on behalf of
Series N and O and provides for the compilation and maintenance of records
pertaining to such investment advisory services, subject to the control and
supervision of the Board of Directors of the Fund and the Investment Manager.
T. Rowe Price is presently a publicly held company which with its affiliates
manages over $95 billion in assets for over 4.5 million individuals and
institutional investor accounts. The Investment Manager pays T. Rowe Price, on
an annual basis, an amount equal to .50% of the average net assets of Series N
which are less than $50,000,000, and .40% of the average net assets of Series N
of $50,000,000 and over, for management services provided to Series N,
provided, however, that the Investment Manager has agreed to pay T. Rowe Price
a minimum fee of $100,000 for the 12 months ended June 30, 1996. The
Investment Manager pays T. Rowe Price, on an annual basis, an amount equal to
.50% of the first $20,000,000 of average daily net assets of Series O and .40%
of such assets in excess of $20,000,000 for management services provided to
Series O. For any month in which the average daily net assets of Series O
exceed $50,000,000, T. Rowe Price will waive .10% of its fee on the first
$20,000,000 of Series O's average daily net assets. T. Rowe Price's fees for
investment management services are calculated daily and payable monthly.
The Investment Manager has engaged Strong Capital Management, Inc.
("Strong"), 900 Heritage Reserve, Menomonee Falls, Wisconsin 53051, to provide
certain investment advisory services to Series X. Strong is a privately held
corporation which is controlled by Richard S. Strong. Strong was established in
1974 and currently manages over $27 billion in assets. The Investment Manager
pays Strong with respect to Series X, an annual fee based on the combined
average net assets of Series X and another fund to which Strong provides
advisory services. The fee is equal to .50% of the combined average net assets
under $150 million, .45% of the combined average net assets at or above $150
million but less than $500 million, and .40% of the combined average net assets
at or above $500 million.
The Investment Manager has agreed that the total annual expenses of any
Series, including its compensation from such Series, but excluding brokerage
commissions, interest, taxes, and extraordinary expenses, will not exceed the
level of expenses which the Fund is permitted to bear under the most
restrictive expense limitation imposed by any state in which shares of the Fund
are then offered for sale. (The Investment Manager is not aware of any state
that currently imposes limits on the level of mutual fund expenses.) The
Investment Manager will, on a monthly basis, contribute such funds or waive
such portion of its management fee as may be necessary to insure that the
aggregate expenses of any Series will not exceed any such limitation.
Pursuant to an Administrative Services Agreement, dated April 1, 1987, as
amended, the Investment Manager also acts as the administrative agent for the
Fund and as such performs administrative functions and the bookkeeping,
accounting and pricing functions for the Fund. For this service the Investment
Manager receives, on an annual basis, a fee of .045% of the average net assets
of each Series, except that with respect to Series X the Investment Manager
receives on an annual basis, a fee of .09%. For the services identified above,
the Investment Manager also receives, with respect to Series D, K, M and N, an
annual fee equal to the greater of .10 percent of each series' average net
assets or $60,000. The administrative fees paid by the Fund during its fiscal
years ended December 31, 1996, 1995 and 1994, were $1,346,653, $786,425 and
$605,515, respectively. For the period May 1, 1997 (date of inception) to August
31, 1997, Series V paid the Investment Manager $442 for administrative fees.
Under the same Agreement, the Investment Manager acts as the transfer agent
for the Fund. As such, it processes purchase and redemption transactions and
acts as the dividend disbursing agent for the separate

56
<PAGE>

accounts of Security Benefit Life Insurance Company to which shares of the Fund
are sold. For this service, the Investment Manager receives an annual
maintenance fee of $8.00 per account, and a transaction fee of $1.00 per
transaction. The transfer agency fees paid by the Fund during its fiscal years
ended December 31, 1996, 1995 and 1994, were $30,787, $18,750 and $13,242,
respectively. For the period May 1, 1997 (date of inception) to August 31, 1997,
Series V paid the Investment Manager $66 for transfer agency fees.
The expense ratio of each Series for the fiscal year end December 31,
1996, was as follows: Series A - .83%; Series B - .84%; Series C - .58%; Series
D - 1.30%; Series E - .83%; Series S - .84%; Series J - .84%; Series K - .84%;
Series M - 1.34%; Series N - 1.45%; and Series O - 1.15%. The annualized
expense ratio of Series P for the period August 5, 1996 (date of inception) to
December 31, 1996 was .28% and for Series V for the period May 1, 1997 (date of
inception) to August 31, 1997, was .55%. None of the foregoing information is
available for Series X as it did not begin operations until October of 1997.
During the fiscal year ended December 31, 1996, the Investment Manager waived
the management fee of Series K and P, and during the fiscal year ending
December 31, 1997, the Investment Manager will waive the management fee of
Series K, P, V and X. In the absence of such waivers, the expense ratios for
Series K, P and V would have been higher.
The Fund will pay all its expenses not assumed by the Investment Manager
including directors' fees; fees and expenses of custodian; taxes and
governmental fees; interest charges; any membership dues; brokerage
commissions; reports, proxy statements, and notices to stockholders; costs of
stockholder and other meetings; and legal, auditing and accounting expenses.
The Fund will also pay all expenses in connection with the Fund's registration
under the Investment Company Act of 1940 and the registration of its capital
stock under the Securities Act of 1933.
The following persons are affiliated with the Fund and also with the
Investment Manager in the capacities indicated:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
NAME POSITION WITH SBL FUND POSITIONS WITH SECURITY MANAGEMENT COMPANY, LLC
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
James R. Schmank Vice President and Treasurer Senior Vice President, Treasurer, Chief Fiscal
Officer and Managing Member Representative

John D. Cleland President and Director Senior Vice President and Managing Member
Representative

Jane A. Tedder Vice President Vice President and Senior Portfolio Manager

Terry A. Milberger Vice President Senior Vice President and Senior Portfolio
Manager

James P. Schier Assistant Vice President Assistant Vice President and Portfolio Manager

Cindy L. Shields Assistant Vice President Assistant Vice President and Portfolio Manager

Mark E. Young Vice President Vice President

Amy J. Lee Secretary Secretary

Brenda M. Harwood Assistant Treasurer and Assistant Vice President, Assistant Treasurer
Assistant Secretary and Assistant Secretary

Thomas A. Swank Assistant Vice President Vice President and Portfolio Manager

Steven M. Bowser Assistant Vice President Second Vice President and Portfolio Manager

Barbara J. Davison Assistant Vice President Compliance Officer, Assistant Vice President
and Portfolio Manager

David Eshnaur Assistant Vice President Assistant Vice President and Portfolio Manager
- -----------------------------------------------------------------------------------------------------
</TABLE>

PORTFOLIO MANAGEMENT

57
<PAGE>

Davison, David Eshnaur, Elaine Miller and Paulette Schwerdt. The Fixed Income
Team is responsible for determining general investment strategy and monitoring
portfolio guidelines. Tom Swank, Portfolio Manager, has day-to-day
responsibility for managing the fixed income portion of Series B's portfolio and
has managed this portion of the portfolio since 1994. SERIES D (WORLDWIDE EQUITY
SERIES) is managed by an investment management team of Lexington. Richard T.
Saler and Alan Wapnick have the day-to-day responsibility for managing the
investments of Series D and have managed the Series since 1994. SERIES E (HIGH
GRADE INCOME SERIES) is managed by the Fixed Income Team described above. Tom
Swank and Steve Bowser have day-to-day responsibility for managing Series E and
have managed the Series since June 1997. SERIES J (EMERGING GROWTH SERIES) and
SERIES S (SOCIAL AWARENESS SERIES) are managed by the Investment Manager's Small
Capitalization Team and Social Responsibility Team, respectively, each of which
consists of John Cleland, Chief Investment Strategist, Cindy Shields, Larry
Valencia and Frank Whitsell. The Small Capitalization Team and the Social
Responsibility Team are responsible for determining general investment strategy
and monitoring portfolio guidelines. Cindy Shields, Portfolio Manager, has
day-to-day responsibility for managing Series J and Series S and has managed the
Series since 1994. SERIES K (GLOBAL AGGRESSIVE BOND SERIES) is managed by an
investment management team of Lexington and MFR. Denis P. Jamison and Maria
Fiorini Ramirez have day-to-day responsibility for managing Series K and have
managed the Series since its inception in 1995. SERIES M (SPECIALIZED ASSET
ALLOCATION SERIES) is managed by an investment management team of portfolio
managers of the Investment Manager and Meridian. Jane Tedder, Senior Economist,
has day-to-day responsibility for managing the fixed-income portion of the
Series' portfolio and has had responsibility for the Series since January 1996.
Pat Boyle, Portfolio Manager of Meridian, has day-to-day responsibility for
managing the equity portion of the Series' portfolio. He has had day-to-day
responsibility for managing the equity portion of the Series since August 1997
SERIES N (MANAGED ASSET ALLOCATION SERIES) is managed by an Investment Advisory
Committee of T. Rowe Price consisting of Edmund M. Notzon, Chairman, Heather R.
Landon, James M. McDonald, Jerome Clark, Peter Van Dyke, M. David Testa and
Richard T. Whitney. Mr. Notzon has had day-to-day responsibility for managing
the Series since its inception in 1995. SERIES O (EQUITY INCOME SERIES) is
managed by an Investment Advisory Committee of T. Rowe Price consisting of Brian
C. Rogers, Chairman, Thomas H. Broadus, Jr., Richard P. Howard and William J.
Stromberg. Mr. Rogers has had day-to-day responsibility for managing the Series
since its inception in 1995. SERIES P (HIGH YIELD SERIES) is managed by the
Fixed Income Team described above. Tom Swank and David Eshnaur have day-to-day
responsibility for managing the investments of Series P. Mr. Swank has managed
the Series since its inception in 1996 and Mr. Eshnaur has managed the Series
since July 1997. SERIES V (VALUE SERIES) is managed by the Large Capitalization
Team described above. Jim Schier has day-to-day responsibility for managing
Series V and has managed the Series since its inception in 1997. SERIES X (SMALL
CAP SERIES) is managed by Ronald C. Ognar of Strong. He has had day-to-day
responsibility for managing Small Cap Fund since its inception in 1997.
Steve Bowser is Assistant Vice President and Portfolio Manager of the
Investment Manager. Prior to joining the Investment Manager in 1992, he was
Assistant Vice President and Portfolio Manager with the Federal Home Loan Bank
of Topeka from 1989 to 1992. He was employed at the Federal Reserve Bank of
Kansas City in 1988 and began his career with the Farm Credit System from 1982
to 1987, serving as a Senior Financial Analyst and Assistant Controller. He
graduated with a Bachelor of Science degree from Kansas State University in
1982. He is a Chartered Financial Analyst.
Pat Boyle is a research analyst and portfolio manager at Meridian. He has
four years of investment experience and is a Chartered Financial Analyst. Mr.
Boyle graduated from the University of Denver with a B.S.B.A. degree in
Finance.
John Cleland has been involved in the securities industry for more than 30
years. Before joining the Investment Manager in 1968, he was involved in the
investment business in securities and residential and commercial real estate
for approximately ten years. Mr. Cleland earned a Bachelor of Science degree
from the University of Kansas and an M.B.A. from Wharton School of Finance,
University of Pennsylvania.
David Eshnaur is Assistant Vice President and Portfolio Manager of the
Investment Manager. Mr. Eshnaur has 15 years of investment experience. Prior
to joining the Investment Manager in 1997, he worked at Waddell & Reed in the
positions of Assistant Vice president, Assistant Portfolio Manager, Senior
Analyst, Industry Analyst and Account Administrator. Mr. Eshnaur earned a
Bachelor of Arts degree in Business Administration from Coe College and and
M.B.A. degree in Finance from the University of Missouri - Kansas City.

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<PAGE>

Denis P. Jamison, CFA, Senior Vice President, Director Fixed Income
Strategy, is responsible for fixed-income portfolio management for Lexington.
He is a member of the New York Society of Security Analysts. Mr. Jamison has
more than 20 years investment experience. Prior to joining Lexington in 1981,
Mr. Jamison had spent nine years at Arnold Bernhard and Company, an investment
counseling and financial services organization. At Bernhard, he was a Vice
President supervising the security analyst staff and managing investment
portfolios. He is a specialist in government, corporate and municipal bonds.
Mr. Jamison is a graduate of the City College of New York with a B.A. in
Economics.
Terry A. Milberger is a Vice President and Senior Portfolio Manager of the
Investment Manager. Mr. Milberger has more than 19 years of investment
experience. He began his career as an investment analyst in the insurance
industry and from 1974 through 1978 he served as an assistant portfolio manager
for the Investment Manager. He was then employed as Vice President of Texas
Commerce Bank and managed its pension fund assets until he returned to the
Investment Manager in 1981. Mr. Milberger holds a Bachelor's degree in
Business and an M.B.A. from the University of Kansas and is a Chartered
Financial Analyst.
Edmund M. Notzon joined T. Rowe Price in 1989 and has been managing
investments since 1991. Prior to joining T. Rowe Price, Mr. Notzon was
Director of the Analysis and Evaluation Division at the U.S. Environmental
Protection Agency.
Ronald C. Ognar, Portfolio Manager of Strong, is a Chartered Financial
Analyst with more than 25 years of investment experience. Mr. Ognar joined
Strong in April 1993 after two years as a principal and Portfolio Manager with
RCM Capital Management. Prior to his position at RCM Capital Management, he was
a Portfolio Manager at Kemper Financial Services in Chicago. Mr. Ognar began his
investment career in 1968 at LaSalle National Bank. He is a graduate of the
University of Illinois with a bachelor's degree in accounting.
Maria Fiorini Ramirez, President and Chief Executive Officer of MFR, began
her career as a credit analyst with American Express International Banking
Corporation in 1968. In 1972, she moved to Banco Nazionale De Lavoro in New
York. The following year, she started a ten year association with Merrill
Lynch, serving as Vice President and Senior Money Market Economist. She joined
Becker Paribas in 1984 as Vice President and Senior Money Market Economist
before joining Drexel Burnham Lambert that same year as First Vice President
and Money Market Economist. She was promoted to Managing Director of Drexel in
1986. From April 1990 to August 1992, Ms. Ramirez was the President and Chief
Executive Officer of Maria Ramirez Capital Consultants, Inc., a subsidiary of
John Hancock Freedom Securities Corporation. Ms. Ramirez established MFR in
August, 1992. She is known in international financial, banking and economic
circles for her assessment of the interaction between global economic policy
and political trends and their effect on investments. Ms. Ramirez holds a B.A.
in Business Administration/Economics from Pace University.
Brian C. Rogers joined T. Rowe Price in 1982 and has been managing
investments since 1983.
Richard T. Saler is a Senior Vice President of Lexington and is
responsible for international investment analysis and portfolio management. He
has eleven years of investment experience. Mr. Saler has focused on
international markets since first joining Lexington in 1986. Most recently he
was a strategist with Nomura Securities and rejoined Lexington in 1992. Mr.
Saler is a graduate of New York University with a B.S. degree in Marketing and
an M.B.A. in Finance from New York University's Graduate School of Business
Administration.
James P. Schier, Assistant Vice President and Portfolio Manager of the
Investment Manager, has 13 years experience in the investment field and is a
Chartered Financial Analyst. While employed by the Investment Manager, he also
served as a research analyst. Prior to joining the Investment Manager in 1995,
he was a portfolio manager for Mitchell Capital Management from 1993 to 1995.
From 1988 to 1995 he served as Vice President and Portfolio Manager for Fourth
Financial. Prior to 1988, Mr. Schier served in various positions in the
investment field for Stifel Financial, Josepthal & Company and Mercantile Trust
Company. Mr. Schier earned a Bachelor of Business degree from the University
of Notre Dame and an M.B.A. from Washington University.
Cindy L. Shields is a Portfolio Manager of the Investment Manager. Ms.
Shields has eight years experience in the securities field and joined the
Investment Manager in 1989. She has been a portfolio manager since 1994, and
prior to that time, she served as a research analyst for the Investment
Manager. Ms. Shields graduated from Washburn University with a Bachelor of
Business Administration degree, majoring in finance and economics. She is a
Chartered Financial Analyst.
Tom Swank, Portfolio Manager of the Investment Manager, has over ten years
of experience in the investment field. He is a Chartered Financial Analyst.
Prior to joining the Investment Manager in 1992, he was an Investment

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<PAGE>

Underwriter and Portfolio Manager for U.S. West Financial Services, Inc. from
1986 to 1992. From 1984 to 1986, he was a Commercial Credit Officer for United
Bank of Denver. From 1982 to 1984, he was employed as a Bank Holding Company
examiner for the Federal Reserve Bank of Kansas City - Denver Branch. Mr. Swank
graduated from Miami University in Ohio with a Bachelor of Science degree in
finance in 1982 and earned a Master of Business Administration degree from the
University of Colorado.
Jane Tedder, Vice President and Senior Portfolio Manager of the Investment
Manager, has 20 years of experience in the investment field. Ms. Tedder has
been a portfolio manager for the Investment Manager since 1983. Prior to
joining the Investment Manager in 1983, she served as Vice President and Trust
Officer of Douglas County Bank in Kansas. Ms. Tedder earned a bachelor's
degree in education from Oklahoma State University and advanced diplomas from
National Graduate Trust School, Northwestern University, and Stonier Graduate
School of Banking, Rutgers University. She is a Chartered Financial Analyst.
Alan Wapnick is a Senior Vice President of Lexington and is responsible
for equity analysis and portfolio management. He has 27 years of investment
experience. Prior to joining Lexington in 1986, Mr. Wapnick was an equity
analyst with Merrill Lynch, J. & W. Seligman, Dean Witter and most recently
Union Carbide Corporation. Mr. Wapnick is a graduate of Dartmouth College and
received a Master's degree in Business Administration from Columbia University.

CODE OF ETHICS

The Fund, the Investment Manager and the Distributor have a written Code
of Ethics which requires all access persons to obtain prior clearance before
engaging in any personal securities transactions. Access persons include
officers and directors of the Fund and Investment Manager and employees that
participate in, or obtain information regarding, the purchase or sale of
securities by the fund or whose job relates to the making of any
recommendations with respect to such purchases or sales. All access persons
must report their personal securities transactions within ten days of the end
of each calendar quarter. Access persons will not be permitted to effect
transactions in a security if it: (a) is being considered for purchase or sale
by the Fund; (b) is being purchased or sold by the Fund; or (c) is being
offered in an initial public offering. In addition, portfolio managers are
prohibited from purchasing or selling a security within seven calendar days
before or after a Fund that he or she manages trades in that security. Any
material violation of the Code of Ethics is reported to the Board of the Fund.
The Board also reviews the administration of the Code of Ethics on an annual
basis.

PORTFOLIO TURNOVER

Generally, long-term rather than short-term investments will be made by
the Fund for Series A, B, D, E, S, J, P and V. Series J, however, reserves the
right during certain periods to trade to a substantial degree for the short
term. Although portfolio securities generally will be purchased with a view to
long-term potential, subsequent changes in the circumstances of a particular
company or industry, or in general economic conditions, may indicate that sale
of a portfolio security is desirable without regard to the length of time it
has been held or to the tax consequences thereof. The annual portfolio
turnover rate of Series A, S, J, M and V may exceed 100% and at times may
exceed 150%. The annual turnover rate of Series E, K and P may exceed 100%.
The annual turnover rate of Series B, D, N and O are not generally expected to
exceed 100%. The annual portfolio turnover rate of Series X is not expected to
exceed 200%.
Portfolio turnover is defined as the lesser of purchases or sales of
portfolio securities divided by the average market value of portfolio
securities owned during the year, determined monthly. The annual portfolio
turnover rates for Series A, B, D, E, S, J, K, M, N, O and P for the fiscal
years ended December 31, 1996, 1995 and 1994, are as follows:

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<PAGE>

----------------------------------------------
1996 1995 1994
----------------------------------------------
Series A 57% 83% 90%
Series B 58% 94% 43%
Series D 115% 169% 82%
Series E 232% 180% 185%
Series S 67% 122% 67%
Series J 123% 202% 91%
Series K 86% 127%* --
Series M 40% 181%* --
Series N 41% 26%* --
Series O 22% 3%* --
Series P 151%** -- --
----------------------------------------------
*Annualized portfolio turnover rates for the
period June 1, 1995 (date of inception) to
December 31, 1995.
**Annualized portfolio turnover rate for the
period August 5, 1996 (date of inception)
to December 31, 1996.
----------------------------------------------

For this purpose the term "securities" does not include government
securities or debt securities maturing within one year after acquisition. Since
Series C's investment policies require a maturity shorter than 13 months, the
portfolio turnover rate will generally be 0%, although the portfolio will turn
over many times during a year. The annualized portfolio turnover rate for Series
V for the period May 1, 1997 (date of inception) to August 31, 1997 was 48%.
Portfolio turnover information is not yet available for Series X as it did not
begin operations until October of 1997.

DETERMINATION OF NET ASSET VALUE

As discussed in the Prospectus for the Fund, the net asset value per share
of each Series is determined as of the close of regular trading hours on the
New York Stock Exchange (normally 3:00 p.m. Central time) on each day that the
Exchange is open for trading (other than a day on which no shares of a Series
are tendered for redemption and no order to purchase shares of a Series is
received). The New York Stock Exchange is open for trading Monday through
Friday except when closed in observance of the following holidays: New Year's
Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day,
July Fourth, Labor Day, Thanksgiving Day and Christmas. The determination is
made by dividing the value of the portfolio securities of each Series, plus any
cash or other assets (including dividends accrued but not collected), less all
liabilities (including accrued expenses but excluding capital and surplus), by
the number of shares of each Series outstanding. In determining asset value,
securities listed or traded on a recognized securities exchange are valued on
the basis of the last sale price. If there are no sales on a particular day,
then the securities shall be valued at the last bid price. All other
securities for which market quotations are available are valued on the basis of
the last current bid price. If there is no bid price, or if the bid price is
deemed to be unsatisfactory by the board of directors or the Fund's Investment
Manager, then the securities shall be valued in good faith by such method as
the board of directors determines will reflect their fair market value.
Circumstances under which the board of directors or the Fund's Investment
Manager may consider the bid price include instances in which the spread
between the bid and the asked prices is substantial, trades have been
infrequent or the size of the trades which have occurred are not
representative of the Fund's holdings.
As stated in the Prospectus, the Fund's short-term debt securities may be
valued by the amortized cost method. As a result of using this method, during
periods of declining interest rates, the yield on shares of these Series
(computed by dividing the annualized income of the Fund by the net asset value
computed as described above) may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by the Fund for instruments with
remaining maturities of 60 days or less resulted in a lower aggregate portfolio
value on a particular day, a prospective investor would be able to obtain a
somewhat higher yield than would result from investment in a fund utilizing
solely market values and existing investors in these Series would receive less
investment income. The converse would apply in a period of rising interest
rates. To the extent that, in the opinion of the board of directors, the
amortized cost value of a portfolio instrument or instruments does not represent
fair value thereof as determined in good faith, the board of directors will take

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<PAGE>

appropriate action which would include a revaluation of all or an appropriate
portion of the portfolio based upon current market factors.

Generally, trading in foreign securities markets is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of foreign securities used in computing the net asset
value of the shares of certain Series of the Fund generally are determined as
of the close of such foreign markets or the close of the New York Stock
Exchange if earlier. Foreign currency exchange rates are generally determined
prior to the close of the New York Stock Exchange. Trading on foreign
exchanges and in foreign currencies may not take place on every day the New
York Stock Exchange is open. Conversely trading in various foreign markets may
take place on days when the New York Stock Exchange is not open and on other
days when the Fund's net asset values are not calculated. Therefore, the
shares of a Series which invests in foreign securities may be significantly
affected on days when investors have no access to the Series. The calculation
of the net asset value for Series that invest in foreign securities may not
occur contemporaneously with the determination of the most current market
prices for the securities included in such calculation, and events affecting
the value of such securities and such exchange rates that occur between the
times at which they are determined and the close of the New York Stock Exchange
will not be reflected in the computation of net asset value. If during such
periods, events occur that materially affect the value of such securities, the
securities will be valued at their fair market value as determined in good
faith by the directors.
For purposes of determining the net asset value per share of the Fund, all
assets and liabilities initially expressed in foreign currencies will be
converted into United States dollars at the mean between the bid and offer
prices of such currencies against United States dollars quoted by any major
U.S. bank.

PORTFOLIO TRANSACTIONS

Transactions in portfolio securities shall be effected in such manner as
deemed to be in the best interests of the Fund and the respective Series. In
reaching a judgment relative to the qualifications of a broker-dealer
("broker") to obtain the best execution of a particular transaction, all
relevant factors and circumstances will be taken into account by the Investment
Manager or relevant Sub-Adviser, including the overall reasonableness of
commissions paid to the broker, the firm's general execution and operational
capabilities and its reliability and financial condition. The execution of
portfolio transactions may be directed to brokers who furnish investment
information or research services to the Investment Manager or relevant
Sub-Adviser. Such information and research services include advice as to the
value of securities, the advisability of investing in, purchasing, or selling
securities, the availability of securities or purchasers or sellers of
securities, and furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy, and performance of
accounts. Such investment information and research services may be furnished
by brokers in many ways, including: (1) on-line data base systems, the
equipment for which is provided by the broker, that enable registrant to have
real-time access to market information, including quotations; (2) economic
research services, such as publications, chart services and advice from
economists concerning macroeconomic information; and (3) analytical investment
information concerning particular corporations. If a transaction is directed
to a broker supplying such information or services, the commission paid for
such transaction may be in excess of the commission another broker would have
charged for effecting that transaction, provided that the Investment Manager
shall have determined in good faith that the commission is reasonable in
relation to the value of the investment information or research services
provided, viewed in terms of either that particular transaction or the overall
responsibilities of the Investment Manager with respect to all accounts as to
which it exercises investment discretion. The Investment Manager may use all,
none or some of such information and services in providing investment advisory
services to the mutual funds under its management, including the Fund.
In addition, brokerage transactions may be placed with brokers who sell
variable contracts offered by SBL or shares of the Funds managed by the
Investment Manager and who may or may not also provide investment information
and research services. The Investment Manager may, consistent with the NASD
Rules of Fair Practice, consider sales of shares of the Fund in the selection
of a broker. The Fund may also buy securities from, or sell securities to,
dealers acting as principals or market makers.
Securities held by the Series may also be held by other investment advisory
clients of the Investment Manager or relevant Sub-Adviser, including other
investment companies. In addition, Security Benefit Life Insurance Company
("SBL"), may also hold some of the same securities as the Series. When selecting
securities for

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<PAGE>

purchase or sale for a Series, the Investment Manager may at the same time be
purchasing or selling the same securities for one or more of such other
accounts. Subject to the Investment Manager's obligation to seek best execution,
such purchases or sales may be executed simultaneously or "bunched." It is the
policy of the Investment Manager not to favor one account over the other. Any
purchase or sale orders executed simultaneously (which may also include orders
from SBL) are allocated at the average price and as nearly as practicable on a
pro rata basis (transaction costs will also generally be shared on a pro rata
basis) in proportion to the amounts desired to be purchased or sold by each
account. In those instances where it is not practical to allocate purchase or
sale orders on a pro rata basis, then the allocation will be made on a rotating
or other equitable basis. While it is conceivable that in certain instances this
procedure could adversely affect the price or number of shares involved in a
Series' transaction, it is believed that the procedure generally contributes to
better overall execution of the Series' portfolio transactions. The Board of
Directors of the Fund has adopted guidelines governing this procedure and will
monitor the procedure to determine that the guidelines are being followed and
that the procedure continues to be in the best interest of the Fund and its
stockholders. With respect to the allocation of initial public offerings
("IPOs"), the Investment Manager may determine not to purchase such offerings
for certain of its clients (including investment company clients) due to the
limited number of shares typically available to the Investment Manager in an
IPO.
The following table sets forth the brokerage fees paid by the Fund during
the last three fiscal years and certain other information:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
TRANSACTIONS DIRECTED TO AND
COMMISSIONS PAID TO BROKER-DEALERS
BROKERAGE COMMISSIONS WHO ALSO PERFORMED SERVICES
PAID TO SECURITY --------------------------------------
TOTAL BROKERAGE DISTRIBUTORS INC., BROKERAGE
YEAR COMMISSIONS PAID THE UNDERWRITER TRANSACTIONS COMMISSIONS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 $4,458,407 $0 $561,547,687 $906,003
1995 4,345,806 0 402,404,593 738,594
1994 2,962,073 0 281,022,190 588,781
</TABLE>

DISTRIBUTIONS AND FEDERAL INCOME TAX CONSIDERATIONS

Each Series intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").
To qualify as a regulated investment company, each Series must, among other
things: (i) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing in
such stock, securities, or currencies ("Qualifying Income Test"); (ii) derive in
each taxable year less than 30% of its gross income from the sale or other
disposition of certain assets held less than three months (namely (a) stock or
securities, (b) options, futures and forward contracts (other than those on
foreign currencies), and (c) foreign currencies (including options, futures, and
forward contracts on such currencies) not directly related to a Series'
principal business of investing in stocks or securities (or options and futures
with respect to stocks and securities)); (iii) diversify its holdings so that,
at the end of each quarter of the taxable year, (a) at least 50% of the market
value of the Series' assets is represented by cash, cash items, U.S. Government
securities, the securities of other regulated investment companies, and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Series' total assets and 10% of the outstanding voting securities of such
issuer, and (b) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. Government securities or
the securities of other regulated investment companies), or of two or more
issuers which the Series controls (as that term is defined in the relevant
provisions of the Code) and which are determined to be engaged in the same or
similar trades or businesses or related trades or businesses; and (iv)
distribute at least 90% of the sum of its investment company taxable income
(which includes, among other items, dividends, interest, and net short-term
capital gains in excess of any net long-term capital losses) and its net
tax-exempt interest each taxable year. The Treasury Department is authorized to
promulgate regulations under which foreign currency gains would constitute
qualifying income for purposes of the Qualifying Income Test only if such gains
are directly

63
<PAGE>

related to investing in securities (or options and futures with respect to
securities). To date, no such regulations have been issued.
A Series qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital losses), if any, that it distributes to shareholders. Each
Series intends to distribute to its shareholders, at least annually,
substantially all of its investment company taxable income and any net capital
gains.
Generally, regulated investment companies, like the Series, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (i) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Series intends
to make its distributions in accordance with the calendar year distribution
requirement. A distribution is treated as paid on December 31 of the calendar
year if it is declared by a Series in October, November or December of that year
to shareholders of record on a date in such a month and paid by the Series
during January of the following calendar year. Such distributions are taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received. The
excise tax provisions described above do not apply to a regulated investment
company, like a Series, all of whose shareholders at all times during the
calendar year are segregated asset accounts of life insurance companies where
the shares are held in connection with variable contracts. (For this purpose,
any shares of a Series attributable to an investment in the Series not exceeding
$250,000 made in connection with the organization of the Series shall not be
taken into account.) Accordingly, if this condition regarding the ownership of
shares of a Series is met, the excise tax will be inapplicable to that Series.
If, as a result of exchange controls or other foreign laws or restrictions
regarding repatriation of capital, a Series were unable to distribute an amount
equal to substantially all of its investment company taxable income (as
determined for U.S. tax purposes) within applicable time periods, the Series
would not qualify for the favorable federal income tax treatment afforded
regulated investment companies, or, even if it did so qualify, it might become
liable for federal taxes on undistributed income. In addition, the ability of
a Series to obtain timely and accurate information relating to its investments
is a significant factor in complying with the requirements applicable to
regulated investment companies, in making tax-related computations, and in
complying with the Code Section 817(h) diversification requirements. Thus, if
a Series were unable to obtain accurate information on a timely basis, it might
be unable to qualify as a regulated investment company, its tax computations
might be subject to revisions (which could result in the imposition of taxes,
interest and penalties), or it might be unable to satisfy the Code Section
817(h) diversification requirements.
CODE SECTION 817(H) DIVERSIFICATION. To comply with regulations under
Section 817(h) of the Code, each Series will be required to diversify its
investments so that on the last day of each quarter of a calendar year, no more
than 55% of the value of its assets is represented by any one investment, no
more than 70% is represented by any two investments, no more than 80% is
represented by any three investments, and no more than 90% is represented by
any four investments. Generally, securities of a single issuer are treated as
one investment and obligations of each U.S. Government agency and
instrumentality are treated for purposes of Section 817(h) as issued by
separate issuers.
In connection with the issuance of the diversification regulations, the
Treasury Department announced that it would issue future regulations or rulings
addressing the circumstances in which a variable contractowner's control of the
investments of a separate account may cause the contractowner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the variable contractowner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in the contractowner's gross income. These future
rules and regulations proscribing investment control may adversely affect the
ability of certain Series of the Fund to operate as described herein. There is,
however, no certainty as to what standards, if any, Treasury will ultimately
adopt. In the event that unfavorable rules or regulations are adopted, there can
be no assurance that the Series will be able to operate as currently

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<PAGE>

described in the Prospectus, or that a Series will not have to change its
investment objective or objectives, investment policies, or investment
restrictions.

PASSIVE FOREIGN INVESTMENT COMPANIES. Some of the Series may invest in
stocks of foreign companies that are classified under the Code as passive
foreign investment companies ("PFICs"). In general, a foreign company is
classified as a PFIC if at least one half of its assets constitutes
investment-type assets or 75% or more of its gross income is investment-type
income. Under the PFIC rules, an "excess distribution" received with respect
to PFIC stock is treated as having been realized ratably over a period during
which the Series held the PFIC stock. The Series itself will be subject to tax
on the portion, if any, of the excess distribution that is allocated to the
Series' holding period in prior taxable years (an interest factor will be added
to the tax, as if the tax had actually been payable in such prior taxable
years) even though the Series distributes the corresponding income to
shareholders. Excess distributions include any gain from the sale of PFIC
stock as well as certain distributions from a PFIC. All excess distributions
are taxable as ordinary income.
A Series may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, a Series
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. In addition, another election may be available that would involve marking
to market a Series' PFIC stock at the end of each taxable year (and on certain
other dates prescribed in the Code), with the result that unrealized gains are
treated as though they were realized. If this election were made, tax at the
Series level under the PFIC rules would be eliminated, but a Series could, in
limited circumstances, incur nondeductible interest charges. A Series' intention
to qualify annually as a regulated investment company may limit the Series'
elections with respect to PFIC stock.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject a Series
itself to tax on certain income from PFIC stock, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not invest in PFIC stock.
OPTIONS, FUTURES AND FORWARD CONTRACTS AND SWAP AGREEMENTS. Certain
options, futures contracts, and forward contracts in which a Series may invest
may be "Section 1256 contracts." Gains or losses on Section 1256 contracts
generally are considered 60% long-term and 40% short-term capital gains or
losses; however, foreign currency gains or losses arising from certain Section
1256 contracts may be treated as ordinary income or loss. Also, Section 1256
contracts held by a Series at the end of each taxable year (and at certain
other times as prescribed pursuant to the Code) are "marked to market" with the
result that unrealized gains or losses are treated as though they were
realized.
Generally, the hedging transactions undertaken by a Series may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by a Series. In addition,
losses realized by a Series on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures,
forward contracts, swap agreements and other financial contracts to a Series
are not entirely clear. The transactions may increase the amount of short-term
capital gain realized by a Series which is taxed as ordinary income when
distributed to shareholders.
A Series may make one or more of the elections available under the Code
which are applicable to straddles. If a Series makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
may operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased as
compared to a fund that did not engage in such hedging transactions.

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Because only a few regulations regarding the treatment of swap agreements,
and related caps, floors and collars, have been implemented, the tax
consequences of such transactions are not entirely clear. The Series
intend to account for such transactions in a manner deemed by them to be
appropriate, but the Internal Revenue Service might not necessarily accept such
treatment. If it did not, the status of a Series as a regulated investment
company, and the Series' ability to satisfy the Code Section 817(h)
diversification requirements, might be affected.
The requirements applicable to a Series' qualification as a regulated
investment company may limit the extent to which a Series will be able to
engage in transactions in options, futures contracts, forward contracts, swap
agreements and other financial contracts.
FOREIGN TAXATION. Income received by a Series from sources within a
foreign country may be subject to withholding and other taxes imposed by that
country. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes.
FOREIGN CURRENCY TRANSACTIONS. Under the Code, gains or losses attributable
to fluctuations in exchange rates which occur between the time a Series accrues
income or other receivables or accrues expenses or other liabilities denominated
in a foreign currency and the time that Series actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures contracts, forward
contracts and options, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition also are treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of a Series' investment company taxable
income to be distributed to its shareholders as ordinary income.
ORIGINAL ISSUE DISCOUNT. Debt securities purchased by a Series (such as
zero coupon bonds) may be treated for U.S. federal income tax purposes as
having original issue discount. Original issue discount is treated as interest
for federal income tax purposes and can generally be defined as the excess of
the stated redemption price at maturity over the issue price. Original issue
discount, whether or not cash payments actually are received by a Series, is
treated for federal income tax purposes as income earned by the Series, and
therefore is subject to the distribution requirements of the Code. Generally,
the amount of original issue discount included in the income of the Series each
year is determined on the basis of a constant yield to maturity which takes
into account the compounding of accrued interest.
In addition, debt securities may be purchased by a Series at a discount
which exceeds the original issue discount remaining on the securities, if any,
at the time the Series purchased the securities. This additional discount
represents market discount for income tax purposes. Treatment of market
discount varies depending upon the maturity of the debt security. Generally,
in the case of any debt security having a fixed maturity date of more than one
year from the date of issue and having market discount, the gain realized on
disposition will be treated as ordinary income to the extent it does not exceed
the accrued market discount on the security (unless the Series elects for all
its debt securities having a fixed maturity date of more than one year from the
date of issue to include market discount in income in tax years to which it is
attributable). Generally, market discount accrues on a daily basis. For any
debt security having a fixed maturity date of not more than one year from the
date of issue, special rules apply which may require in some circumstances the
ratable inclusion of income attributable to discount at which the bond was
acquired as calculated under the Code. A Series may be required to capitalize,
rather than deduct currently, part or all of any net direct interest expense on
indebtedness incurred or continued to purchase or carry any debt security
having market discount (unless the Series makes the election to include market
discount currently).
DISTRIBUTIONS. Distributions of any investment company taxable income by
a Series are taxable to the shareholders as ordinary income. Net capital gains
designated by a Series as capital gain dividends will be treated, to the extent
distributed, as long-term capital gains in the hands of the shareholders,
regardless of the length of time the shareholders may have held the shares.
Any distributions that are not from a Series' investment company taxable income
or net capital gains may be characterized as a return of capital to
shareholders or, in some cases, as capital gain. A distribution will be
treated as paid on December 31 of the calendar year if it is declared by a
Series in October, November or December of that year to shareholders of record
on a date in such a month and paid by the Series during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which they are declared, rather than the calendar year in
which they are received.

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OTHER TAXES. The foregoing discussion is general in nature and is not
intended to provide an exhaustive presentation of the tax consequences of
investing in a Series. Distributions may also be subject to additional
state, local and foreign taxes, depending on each shareholder's particular
situation. Depending upon the nature and extent of a Series' contacts with a
state or local jurisdiction, the Series may be subject to the tax laws of such
jurisdiction if it is regarded under applicable law as doing business in, or as
having income derived from, the jurisdiction. Shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in a Series.

OWNERSHIP AND MANAGEMENT

As of October 1, 1997, SBL controls the Fund by virtue of its indirect
ownership of 100% of the outstanding shares of the Fund as custodian of SBL
Variable Annuity Account III, SBL Variable Annuity Account IV, Variflex,
Variflex LS, Variflex Signature, Security Elite Benefit and Varilife.

CAPITAL STOCK AND VOTING

The Fund has authorized the issuance of an indefinite number of shares of
capital stock of $1.00 par value. Its shares are currently issued in fourteen
Series: Series A, Series B, Series C, Series D, Series E, Series S, Series J,
Series K, Series M, Series N, Series O, Series P, Series V and Series X. The
shares of each Series represent pro rata beneficial interest in that Series'
assets and in the earnings and profits or losses derived from the investment of
such assets. Upon issuance and sale, such shares will be fully paid and
nonassessable. They are fully transferable and redeemable. These shares have no
preemptive rights, but the stockholders of each Series are entitled to receive
dividends as declared for that Series by the board of directors of the Fund.
The shares of each Series have cumulative voting rights for the election
of directors. Within each respective Series, each share has equal voting
rights with each other share and there are no preferences as to conversion,
exchange, retirement or liquidation. On other matters, all shares,
(irrespective of Series) are entitled to one vote each. Pursuant to the rules
and regulations of the Securities and Exchange Commission, in certain
instances, a vote of the outstanding shares of the combined Series may not
modify the rights of holders of a particular Series without the approval of a
majority of the shares of that Series.

CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT

UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri, acts as the
custodian for the portfolio securities of each Series of the Fund, except
Series D, K, M, N and O. The Chase Manhattan Bank, 4 Chase MetroTech Center,
Brooklyn, New York 11245 acts as custodian for the portfolio securities of
Series D, K, M, N and O, including those held by foreign banks and foreign
securities depositories which qualify as eligible foreign custodians under the
rules adopted by the SEC. Security Management Company, LLC is the Fund's
transfer and dividend-paying agent.

INDEPENDENT AUDITORS

The firm of Ernst & Young LLP, One Kansas City Place, 1200 Main Street,
Kansas City, Missouri, has been approved by the Fund's stockholders to serve as
the Fund's independent auditors, and as such, the firm will perform the annual
audit of the Fund's financial statements.

DISTRIBUTION OF VARIABLE INSURANCE PRODUCTS

SBL Fund serves as the underlying investment vehicle for the following
variable insurance products currently issued by Security Benefit Life Insurance
Company: Variflex, Variflex LS, Variflex Signature, Security Elite Benefit and
Varilife. Security Distributors, Inc. (the "Distributor"), a wholly-owned
subsidiary of Security Benefit Group, Inc., is the principal underwriter of the
foregoing variable insurance products. The Distributor has entered into an
agreement with Lexington Management Corporation ("Lexington") pursuant to which
it receives compensation from Lexington to defray expenses it incurs in the
distribution of certain mutual funds sub-advised by Lexington and variable
insurance products certain underlying funds of which are sub-advised by
Lexington and for the access which the Distributor permits Lexington to have to
its network of broker and dealers. The Agreement is currently in effect with
respect to the Global Series of Security Equity Fund and Series D of SBL Fund
(the "Sub-Advised Portfolios"). Pursuant to the terms of the Agreement,
Lexington pays the Distributor a fee, ranging from 0% of the average daily net
assets of the Sub-Advised Portfolios below $50 million to .25% of the average

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daily net assets of the Sub-Advised Portfolios of $400 million or more. The fee
is calculated daily and payable monthly.

PERFORMANCE INFORMATION

The Fund may, from time to time, include the average annual total return
and the total return of the Series in advertisements or reports to shareholders
or prospective investors.
Quotations of average annual total return for a Series will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Series over certain periods that will include periods of 1, 5
and 10 years (up to the life of the Series), calculated pursuant to the
following formula:

P(1+T)n = ERV

(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures assume that all dividends and distributions are reinvested when
paid.
For the 1-, 5- and 10-year periods ended June 30, 1997, the average annual
total return was the following:

------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
------------------------------------------------------
Series A 27.9% 19.5% 13.6%
Series B 24.2% 16.1% 13.2%
Series C 5.1% 3.5% 5.2%
Series D 17.6% 14.3% 4.2%
Series E 5.7% 5.9% 7.6%
Series J 8.0% 16.0%(2) --
Series K 12.1% 11.0%(3) --
Series M 14.7% 14.0%(3) --
Series N 21.1% 17.9%(3) --
Series O 27.3% 26.0%(3) --
Series P 14.7%(4) -- --
Series S 15.0% 17.2% 14.0%(1)
Series V 88.9%(5) -- --
------------------------------------------------------
(1) For the period May 1, 1991 (date of inception)
through December 31, 1996.
(2) For the period October 1, 1992 (date of inception)
through December 31, 1996.
(3) For the period June 1, 1995 (date of inception)
through December 31, 1996.
(4) For the period August 5, 1996 (date of inception)
through June 30, 1997.
(5) For the period May 1, 1997 (date of inception)
through August 31, 1997.
------------------------------------------------------

Quotations of total return for any Series will also be based on a
hypothetical investment in the Series for a certain period, and will assume
that all dividends and distributions are reinvested when paid. The total
return is calculated by subtracting the value of the investment at the
beginning of the period from the ending value and dividing the remainder by the
beginning value. The Investment Manager has waived the management fee for
Series K and P, and in the absence of such waiver, the performance quoted would
be reduced. Performance information is not yet available for Series X.
The aggregate total return on an investment made in shares of Series A
calculated as described above for the period from June 30, 1987 to June 30,
1997 was 257.8%.
Performance information for a Series may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), or other unmanaged indices so
that investors may compare a Series' results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (ii) other groups of mutual funds tracked by Lipper
Analytical Services, a widely used independent research firm which ranks mutual
funds by overall performance, investment objectives, and assets, or tracked by
other services, companies, publications, or persons who rank mutual funds on
overall performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an investment in
the Series. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.

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Such mutual fund rating services include the following: Lipper Analytical
Services; Morningstar, Inc.; Investment Company Data; Schabacker Investment
Management; Wiesenberger Investment Companies Service; Computer Directions
Advisory (CDA); and Johnson's Charts.
Quotations of average annual total return or total return for the Fund
will not take into account charges and deductions against the Separate Accounts
to which the Fund shares are sold or charges and deductions against the
Contracts issued by Security Benefit Life Insurance Company. Performance
information for any Series reflects only the performance of a hypothetical
investment in the Series during the particular time period on which the
calculations are based. Performance information should be considered in light
of the Series' investment objectives and policies, characteristics and quality
of the portfolios and the market conditions during the given time period, and
should not be considered as a representation of what may be achieved in the
future.

FINANCIAL STATEMENTS

The audited financial statements of the Fund for the fiscal year ended
December 31, 1996, which are contained in the Annual Report of SBL Fund, the
unaudited financial statements of the Fund, which are contained in the Fund's
June 30, 1997 Semiannual Report, and the unaudited financial statements of
Series V for the period May 1, 1997 (date of inception) to August 31, 1997, are
incorporated herein by reference. Copies of the Annual Report, Semiannual Report
and the unaudited financial Statements of Series V are provided to every person
requesting a copy of the Statement of Additional Information.

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APPENDIX

DESCRIPTION OF SHORT-TERM INSTRUMENTS

U.S. GOVERNMENT SECURITIES. Federal agency securities are debt
obligations which principally result from lending programs of the U.S.
Government. Housing and agriculture have traditionally been the principal
beneficiaries of federal credit programs, and agencies involved in providing
credit to agriculture and housing account for the bulk of the outstanding
agency securities.
Some U.S. Government securities, such as treasury bills and bonds, 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 Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality.
U.S. Treasury bills are issued with maturities of any period up to one
year. Three-month bills are currently offered by the Treasury on a 13-week
cycle and are auctioned each week by the Treasury. Bills are issued in bearer
form only and are sold only on a discount basis, and the difference between the
purchase price and the maturity value (or the resale price if they are sold
before maturity) constitutes the interest income for the investor.
CERTIFICATES OF DEPOSIT. A certificate of deposit is a negotiable receipt
issued by a bank or savings and loan association in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the
bearer of the receipt on the date specified on the certificate.
COMMERCIAL PAPER. Commercial paper is generally defined as unsecured
short-term notes issued in bearer form by large well-known corporations and
finance companies. Maturities on commercial paper range from a few days to
nine months. Commercial paper is also sold on a discount basis.
BANKERS' ACCEPTANCES. A banker's acceptance generally arises from a
short-term credit arrangement designed to enable businesses to obtain funds to
finance commercial transactions. Generally, an acceptance is a time draft
drawn on a bank by an exporter or an importer to obtain a stated amount of
funds to pay for specific merchandise. The draft is then "accepted" by a bank
that, in effect, unconditionally guarantees to pay the face value of the
instrument on its maturity date.

DESCRIPTION OF COMMERCIAL PAPER RATINGS

A Prime rating is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. ("Moody's"). Issuers rated Prime are further referred
to by use of numbers 1, 2 and 3 to denote relative strength within this highest
classification. Among the factors considered by Moody's in assigning ratings
are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative type risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings
over a period of 10 years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
Commercial paper rated "A" by Standard & Poor's Corporation ("S&P") has
the highest rating and is regarded as having the greatest capacity for timely
payment. Commercial paper rated A-1 by S&P has the following characteristics.
Liquidity ratios are adequate to meet cash requirements. Long-term senior debt
is rated "A" or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. Relative strength or
weakness of the above factors determine whether the issuer's commercial paper
is rated A-1, A-2 or A-3.

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DESCRIPTION OF CORPORATE BOND RATINGS

MOODY'S INVESTORS SERVICE, INC.

Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
AA - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.

STANDARD & POOR'S CORPORATION

AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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 bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominately speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - The rating C is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.