AMERICAN GENERAL SERIES PORTFOLIO CO /TX, 497, 1998-10-05

AMERICAN GENERAL SERIES PORTFOLIO CO /TX
497, 1998-10-05

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<PAGE> 1

AMERICAN GENERAL SERIES
PORTFOLIO COMPANY
2929 ALLEN PARKWAY
HOUSTON, TEXAS 77019
OCTOBER 1, 1998

PROSPECTUS
The American General Series Portfolio Company (the "Series Company") is a mutual
fund made up of 13 separate Funds (the "Funds"), four of which are described in
the prospectus. Each of the Funds has a different investment objective. Each
Fund is explained in more detail on its Fact Sheet contained in this prospectus.
Here is a summary of the goals of the four Funds:

INDEX EQUITY FUNDS:

INTERNATIONAL EQUITIES FUND
Growth through investments tracking the EAFE Index.

MIDCAP INDEX FUND
Growth through investments tracking the S&P MidCap 400 Index.

STOCK INDEX FUND
Growth through investments tracking the S&P 500 Index.

MONEY MARKET FUND:

MONEY MARKET FUND
Income through investments in short-term money market securities.
- --------------------------------------------------------------------------------

SHARES OF THE MONEY MARKET FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT THIS FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.

These Funds are available to you only through a variable annuity contract or
variable life insurance policy you or your employer bought from The Variable
Annuity Life Insurance Company ("VALIC") or one of its affiliates, or employee
thrift plans maintained by VALIC or American General Corporation. VALIC is a
member of the American General Corporation group of companies.

This Prospectus sets forth concisely this information you should know before
investing in the Funds.

Because different contracts contain different combinations of Funds, all of the
Funds in this prospectus may not be available to you. And, there may be some
Funds that are available to you that don't appear in this prospectus. See the
separate prospectus that describes your, or your employer's, annuity contract
for a complete list of Funds in which you may invest. BE SURE TO READ BOTH
PROSPECTUSES IN FULL BEFORE YOU START PARTICIPATING AND KEEP THEM FOR FUTURE
REFERENCE.

VALIC has filed a Statement of Additional Information, dated October 1, 1998,
with the Securities and Exchange Commission ("SEC"). This Statement contains
additional information about these Funds and is part of this prospectus. For a
free copy, write to the American General Series Portfolio Company at the address
above or call 1-800-44-VALIC. The Statement of Additional Information has been
filed with the SEC and is available along with other related materials at the
SEC's internet web site (http://www.sec.gov.).

SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPSOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY, SHARES OF THE FUNDS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
FUNDS. ALSO, IT HAS NOT PASSED ON WHETHER THIS PROSPECTUS IS ADEQUATE OR
ACCURATE. IT IS A CRIMINAL OFFENSE TO STATE OTHERWISE.
<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COVER PAGE
WELCOME........................................ 1

EXPENSE SUMMARY................................ 2

FINANCIAL HIGHLIGHTS........................... 3

ABOUT THE SERIES COMPANY'S MANAGEMENT.......... 6
Investment Adviser........................ 6
Investment Sub-adviser.................... 6
Portfolio Manager......................... 6
How Advisers Are Paid for Their
Services................................ 6
About the Board of Directors.............. 7

ABOUT THE FUNDS................................ 8
Growth, Income and Stability Categories... 8
About Level of Risk....................... 8
About Portfolio Turnover.................. 8
About Fund Performance.................... 8

ABOUT INDEX EQUITY FUNDS....................... 9

HOW TO READ A FUND FACT SHEET.................. 11

FUND FACT SHEETS............................... 12
International Equities Fund............... 12
MidCap Index Fund......................... 14
Money Market Fund......................... 16
Stock Index Fund.......................... 18

TYPES OF INVESTMENTS........................... 20
Stocks.................................... 20
</TABLE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Bonds..................................... 20
Asset-Backed Securities.............. 20
Loan Participations.................. 20
Mortgage-Related Securities............... 21
Illiquid and Restricted Securities........ 21
Foreign Securities........................ 21
ADRs...................................... 22
Foreign Currency.......................... 22
When-Issued Securities.................... 22
Money Market Securities................... 22
Derivatives............................... 22
Options.............................. 22
Futures Contracts.................... 23
Repurchase Agreements..................... 23
A Word About Risk......................... 23
Investment Practices...................... 24
Limitations.......................... 24
Lending Portfolio Securities......... 24

ABOUT THE SERIES COMPANY....................... 25
Series Company Shares..................... 25
Net Asset Value of the Series Company
Shares.................................. 25
Dividends and Capital Gains............... 25
Diversification........................... 26
Taxes..................................... 26
Voting Rights............................. 26
Year 2000 Risks........................... 26
Euro Conversion........................... 27
Reports................................... 27
</TABLE>

(i)
<PAGE> 3

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

Unless otherwise specified in this prospectus, the words we, our, and VALIC mean
The Variable Annuity Life Insurance Company. The words you and your mean the
participant.

American General Series Portfolio Company (the "Series Company") was
incorporated under the laws of Maryland on December 7, 1984.

The Series Company is an open-end management investment company and currently
consists of 13 different Funds, four of which are described in detail in this
prospectus. We serve as each Fund's Investment Adviser and, in this role, report
directly to the Series Company's Board of Directors. As Investment Adviser, we
make investment decisions for the Funds and are responsible for their day to day
operations and perform the cash management function. For more information, see
"About the Series Company's Management" in this prospectus.

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

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

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

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

1
<PAGE> 4

EXPENSE SUMMARY
- --------------------------------------------------------------------------------

Annual fund operating expenses are the fees paid out of the assets of a Fund.
Each Fund pays a management fee to VALIC. The expenses paid by a Fund are
factored into the calculation of its share price or dividends and are not
charged directly to investors. The expenses reflected in the tables below are
based on the Funds' annual operating expenses for the fiscal year ended May 31,
1998.

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

ANNUAL FUND OPERATING EXPENSES
(as a percentage of net assets)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
INTERNATIONAL MID CAP MONEY MARKET STOCK
EQUITIES FUND INDEX FUND FUND INDEX FUND
------------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Management Fee(a) 0.35% 0.32% 0.50% 0.27%
Other Expenses(a)(c) 0.05% 0.04% 0.04% 0.04%
---- ----- ----- -----
Total Fund Operating Expenses(a): 0.40% 0.36% 0.54% 0.31%
==== ===== ===== =====
</TABLE>

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

The purpose of the expense tables above is to assist investors in understanding
the various costs and expenses that a shareholder of a Fund will bear directly
or indirectly. Each Fund's annual operating expenses do not reflect expenses
imposed by separate accounts of VALIC through which an investment in each Fund
is made or their related contracts. A separate account's expenses are fully
explained in your contract prospectus.

2
<PAGE> 5

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
A FUND'S FISCAL YEAR ENDS EVERY MAY 31ST.

Financial highlights are provided below for each of the Funds. The financial
highlights are for the last 10 years of the Funds or if the Fund has been in
operation a shorter period of time, since the date the Fund began operation.
Ernst & Young LLP, Independent Auditors for the Series Company, has audited the
Series Company's financial statements which include the information presented
here. Their unqualified report appears in those audited financial statements,
which are included in the Statement of Additional Information.

Per share data assumes that you held each share from the beginning to the end of
each fiscal year. Total return assumes that you bought additional shares with
dividends paid by the Fund. Total returns for periods of less than one year are
not annualized. The average commission rate paid on investment equity securities
(on a per share basis) is presented for the period beginning June 1, 1996.
- --------------------------------------------------------------------------------

INTERNATIONAL EQUITIES FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 2,
FISCAL YEAR ENDED MAY 31, 1989
------------------------------------------------------------------------------------- TO MAY 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF
PERIOD $11.44 $11.15 $10.42 $10.14 $8.99 $8.03 $8.58 $9.17 $10.00(1)
-------- -------- -------- -------- -------- ------- ------- ------- --------
+ INCOME (LOSS)
from net investment
income 0.23 0.20 0.17 0.15 0.11 0.18 0.15 0.23 0.10
from net realized &
unrealized gain (loss)
on securities 0.85 0.63 0.97 0.34 1.17 0.93 (0.55) (0.59) (0.83)
-------- -------- -------- -------- -------- ------- ------- ------- --------
total income (loss) from
investment operations 1.08 0.83 1.14 0.49 1.28 1.11 (0.40) (0.36) (0.73)
-------- -------- -------- -------- -------- ------- ------- ------- --------
- - DISTRIBUTIONS
from net investment
income (0.24) (0.19) (0.17) (0.15) (0.11) (0.15) (0.15) (0.23) (0.10)
from net realized gain
on securities (0.33) (0.35) (0.24) (0.06) (0.02) -- -- -- --
-------- -------- -------- -------- -------- ------- ------- ------- --------
total distributions (0.57) (0.54) (0.41) (0.21) (0.13) (0.15) (0.15) (0.23) (0.10)
-------- -------- -------- -------- -------- ------- ------- ------- --------
= SHARE VALUE
AT END OF PERIOD $11.95 $11.44 $11.15 $10.42 $10.14 $8.99 $8.03 $8.58 $9.17
======== ======== ======== ======== ======== ======= ======= ======= ========
TOTAL RETURN 9.92% 7.74% 11.14% 4.92% 14.31% 14.18% (4.69)% (3.71)% (7.42)%
======== ======== ======== ======== ======== ======= ======= ======= ========
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to
average net assets 0.40% 0.42% 0.42% 0.45% 0.47% 0.53% 0.65% 0.37% 0.19%
Ratio of net investment
income to average net
assets 1.92% 1.75% 1.65% 1.47% 1.43% 2.33% 1.84% 2.67% 1.10%
Portfolio turnover rate 9% 12% 20% 14% 7% 9% 5% 3% 0%
Number of shares
outstanding at end of
year (000's) 13,009 15,857 18,497 20,074 17,273 7,429 4,256 2,451 1,310
Net assets at end of year
(000's) $155,469 $181,437 $206,259 $209,091 $175,183 $66,809 $34,182 $21,036 $12,005
Average net assets during
the year (000's) $165,984 $191,117 $204,792 $199,235 $117,264 $45,509 $26,542 $15,693 $ 7,853
Average commission rate
paid $0.0332 $0.0236 N/A N/A N/A N/A N/A N/A N/A
</TABLE>

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

(1) The net asset value at the beginning of the period is as of commencement of
operations on October 2, 1989.

3
<PAGE> 6
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------

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

MIDCAP INDEX FUND(1)

----------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $20.83 $19.09 $15.68 $14.54 $14.38 $12.86 $12.51
-------- -------- -------- -------- -------- -------- --------
+ INCOME (LOSS)
from net investment income 0.23 0.24 0.24 0.26 0.23 0.24 0.23
from net realized & unrealized
gain (loss) on securities 5.80 2.95 4.06 1.59 0.28 1.93 0.39
-------- -------- -------- -------- -------- -------- --------
total income (loss) from
investment operations 6.03 3.19 4.30 1.85 0.51 2.17 0.62
-------- -------- -------- -------- -------- -------- --------
- - DISTRIBUTIONS
from net investment income (0.23) (0.24) (0.24) (0.26) (0.23) (0.24) (0.23)
from net realized gain on
securities (1.36) (1.21) (0.65) (0.45) (0.12) (0.41) (0.04)
-------- -------- -------- -------- -------- -------- --------
total distributions (1.59) (1.45) (0.89) (0.71) (0.35) (0.65) (0.27)
-------- -------- -------- -------- -------- -------- --------
= SHARE VALUE
AT END OF YEAR $25.27 $20.83 $19.09 $15.68 $14.54 $14.38 $12.86
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN 29.62% 17.48% 28.10% 13.26% 3.52% 17.21% 5.01%
======== ======== ======== ======== ======== ======== ========

RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.36% 0.40% 0.41% 0.44% 0.46% 0.47% 0.54%
Ratio of net investment income to
average net assets 0.95% 1.24% 1.36% 1.73% 1.62% 1.79% 1.82%
Portfolio turnover rate 26% 19% 21% 23% 17% 5% 112%
Number of shares outstanding at
end of year (000's) 31,830 29,137 28,322 25,988 24,001 14,673 8,862
Net assets at end of year (000's) $804,318 $607,061 $540,688 $407,557 $349,041 $210,931 $113,992
Average net assets during the year
(000's) $722,652 $554,397 $477,372 $376,486 $285,247 $154,979 $88,456
Average commission rate paid $0.0278 $0.0277 N/A N/A N/A N/A N/A

<CAPTION>
FISCAL YEAR ENDED MAY 31,
------------------------------
1991 1990 1989
-------- -------- --------
<S> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $12.92 $12.25 $10.86
------- ------- -------
+ INCOME (LOSS)
from net investment income 0.28 0.28 0.30
from net realized & unrealized
gain (loss) on securities (0.30) 0.71 1.51
------- ------- -------
total income (loss) from
investment operations (0.02) 0.99 1.81
------- ------- -------
- - DISTRIBUTIONS
from net investment income (0.28) (0.32) (0.27)
from net realized gain on
securities (0.11) -- (0.15)
------- ------- -------
total distributions (0.39) (0.32) (0.42)
------- ------- -------
= SHARE VALUE
AT END OF YEAR $12.51 $12.92 $12.25
======= ======= =======
TOTAL RETURN 0.20% 8.22% 17.06%
======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.67% 0.68% 0.74%
Ratio of net investment income to
average net assets 2.41% 2.29% 2.72%
Portfolio turnover rate 101% 131% 67%
Number of shares outstanding at
end of year (000's) 6,168 5,712 5,354
Net assets at end of year (000's) $77,146 $73,815 $65,586
Average net assets during the year
(000's) $69,696 $67,421 $57,398
Average commission rate paid N/A N/A N/A
</TABLE>

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

(1) Effective October 1, 1991 the Fund's name was changed from the Capital
Accumulation Fund to the MidCap Index Fund. Additionally, on October 1, 1991
the investment objectives and investment program for the Fund were changed.
Bankers Trust has been the Fund's Sub-adviser since May 1, 1992.

4
<PAGE> 7
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------

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

MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-------- -------- ------- -------- -------- ------- -------
+ INCOME
from net investment income 0.05 0.05 0.05 0.05 0.03 0.03 0.05
-------- -------- ------- -------- -------- ------- -------
- - DISTRIBUTIONS
from net investment income (0.05) (0.05) (0.05) (0.05) (0.03) (0.03) (0.05)
-------- -------- ------- -------- -------- ------- -------
= SHARE VALUE
AT END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
======== ======== ======= ======== ======== ======= =======
TOTAL RETURN 5.25% 5.02% 5.26% 4.90% 2.83% 2.85% 4.47%
======== ======== ======= ======== ======== ======= =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.54% 0.57% 0.57% 0.57% 0.58% 0.63% 0.67%
Ratio of net investment income to
average net assets 5.14% 4.95% 5.14% 4.75% 2.78% 2.81% 4.42%
Number of shares outstanding at
end of year (000's) 190,975 128,125 83,618 82,256 50,534 45,323 48,355
Total net assets at end of year
(000's) $190,975 $128,125 $83,618 $82,254 $50,533 $45,322 $48,353
Average net assets during the
year (000's) $150,625 $113,882 $84,271 $67,021 $46,222 $45,562 $46,305

<CAPTION>
FISCAL YEAR ENDED MAY 31,
--------------------------------
1991 1990 1989
-------- -------- --------
<S> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF YEAR $1.00 $1.00 $1.00
------- ------- -------
+ INCOME
from net investment income 0.07 0.08 0.08
------- ------- -------
- - DISTRIBUTIONS
from net investment income (0.07) (0.08) (0.08)
------- ------- -------
= SHARE VALUE
AT END OF YEAR $1.00 $1.00 $1.00
======= ======= =======
TOTAL RETURN 7.11% 8.31% 8.63%
======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net
assets 0.68% 0.74% 0.46%
Ratio of net investment income to
average net assets 6.86% 7.93% 8.39%
Number of shares outstanding at
end of year (000's) 38,572 27,628 21,445
Total net assets at end of year
(000's) $38,570 $27,628 $21,445
Average net assets during the
year (000's) $34,733 $22,563 $13,385
</TABLE>

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

SMALL CAP INDEX FUND(1)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31, PERIOD FROM
--------------------------------------------------------------- MAY 1, 1992
1998 1997 1996 1995 1994 1993 TO MAY 31, 1992
-------- -------- -------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
SHARE VALUE AT BEGINNING OF PERIOD $16.18 $16.25 $12.49 $11.52 $11.28 $ 9.93 $ 10.00(1)
-------- -------- -------- -------- -------- -------- -------
+ INCOME (LOSS)
from net investment income 0.19 0.19 0.20 0.17 0.13 0.15 0.02
from net realized & unrealized gain
(loss) on securities 3.17 0.93 4.04 0.97 0.58 1.48 (0.07)
-------- -------- -------- -------- -------- -------- -------
total income (loss) from investment
operations 3.36 1.12 4.24 1.14 0.71 1.63 (0.05)
-------- -------- -------- -------- -------- -------- -------
- - DISTRIBUTIONS
from net investment income (0.19) (0.19) (0.20) (0.17) (0.13) (0.15) (0.02)
from net realized gain on securities (1.41) (1.00) (0.28) -- (0.34) (0.13) --
-------- -------- -------- -------- -------- -------- -------
total distributions (1.60) (1.19) (0.48) (0.17) (0.47) (0.28) (0.02)
-------- -------- -------- -------- -------- -------- -------
= SHARE VALUE
AT END OF PERIOD $17.94 $16.18 $16.25 $12.49 $11.52 $11.28 $ 9.93
======== ======== ======== ======== ======== ======== =======
TOTAL RETURN 21.34% 7.51% 34.50% 9.98% 6.18% 16.64% (0.50)%
======== ======== ======== ======== ======== ======== =======
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 0.39% 0.41% 0.41% 0.44% 0.47% 0.47% 0.04%
Ratio of net investment income to average
net assets 1.05% 1.34% 1.36% 1.44% 1.10% 1.40% 0.21%
Portfolio turnover rate 36% 42% 31% 34% 16% 20% 0%
Number of shares outstanding at end of
year (000's) 13,777 11,893 11,129 10,136 9,381 3,687 1,107
Net assets at end of year (000's) $247,183 $192,459 $180,785 $126,567 $108,050 $ 41,581 $10,989
Average net assets during the year (000's) $227,757 $178,368 $150,448 $120,298 $70,690 $ 22,142 $10,989
Average commission rate paid $0.0162 $0.0297 N/A N/A N/A N/A N/A
</TABLE>

- ------------
(1) The net asset value at the beginning of the period is as of commencement of
operations on May 1, 1992. Bankers Trust has been the Fund's Sub-adviser
since May 1, 1992.

5
<PAGE> 8

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

INVESTMENT ADVISER

VALIC, a stock life insurance company, has been in the investment advisory
business since 1960. VALIC as of June 30, 1998, had over $8.5 billion in assets
under management. Since May 30, 1985, VALIC has been the Investment Adviser for
the Funds that comprise the Series Company, four of which are described in this
prospectus.

VALIC is a member of the American General Corporation group of companies. The
American General Corporation group of companies is a leading provider of
retirement services, life insurance, and consumer loans. Members of the American
General Corporation group of companies operate in each of the 50 states and
Canada and collectively provide financial services with activities heavily
weighted toward insurance.

As Investment Adviser, VALIC is responsible for each Fund's day to day
operations. Also, VALIC supervises the purchase and sale of Fund Investments and
performs the cash management function. For the MidCap Index Fund and the Stock
Index Fund, VALIC employs an Investment Sub-adviser who makes investment
decisions for such Fund(s). However, we make investment decisions for, and are
directly responsible for the day to day management of the Money Market Fund and
the International Equities Fund. VALIC serves as Investment Adviser through an
Investment Advisory Agreement it enters into with each Fund. These agreements
are renewed once each year, by the Series Company Board of Directors.

One Investment Advisory Agreement covers these Funds:

<TABLE>
<CAPTION>
EFFECTIVE DATE OF
FUND NAME AGREEMENT
--------- -----------------
<S> <C>
Money Market Fund September 7, 1990
International Equities Fund October 1, 1991
</TABLE>

Another Investment Advisory Agreement covers these Funds:

<TABLE>
<CAPTION>
EFFECTIVE DATE OF
FUND NAME AGREEMENT
--------- -----------------
<S> <C>
MidCap Index Fund May 1, 1992
Stock Index Fund
</TABLE>

For more information on these Agreements, see the "Investment Adviser" section
in the Statement of Additional Information.

INVESTMENT SUB-ADVISER

For some of the Funds, VALIC works with an Investment Sub-adviser, a financial
service company that specializes in certain types of investing. However, VALIC
still retains ultimate responsibility for managing the Funds. The Sub-adviser's
role is to make investment decisions for the Funds according to each Fund's
investment objectives and restrictions.

Bankers Trust Company ("Bankers Trust") has been the Sub-adviser for the MidCap
Index Fund and the Stock Index Fund since May 1, 1992. Bankers Trust first
offered investment management services in 1938 and began managing index funds in
1977. As of March 31, 1998, Bankers Trust managed $337.8 billion in assets.
Bankers Trust is entirely owned by the Bankers Trust New York Corporation, a
bank holding company. Bankers Trust is the seventh largest U.S. financial
services institution as of December 31, 1996. Bankers Trust's principal offices
are located at 130 Liberty Street, New York, NY 10006.

Bankers Trust acts as Investment Sub-adviser through an agreement entered into
with VALIC. For more information on this agreement and on the Sub-adviser, see
the "Investment Sub-Advisers" section in the Statement of Additional
Information.

PORTFOLIO MANAGER

A portfolio manager is a person or team of persons VALIC, or its Sub-adviser,
has assigned to be primarily responsible for the day to day management of a
Fund's investments. A Fund's investments are called its portfolio.

HOW ADVISERS ARE PAID FOR
THEIR SERVICES

VALIC

Each Fund pays VALIC a fee based on its average daily net asset value. A Fund's
net asset value is the total value of the Fund's assets minus any money it owes
for operating expenses, such as the fee paid to its Custodian to safeguard the
Fund's investments.

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

<TABLE>
<CAPTION>
ADVISORY FEE
FUND NAME (ANNUAL RATE)
--------- --------------------
<S> <C>
International Equities Fund 0.35% on the first
$500 million
MidCap Index Fund 0.25% on assets over
$500 million
Stock Index Fund
Money Market Fund 0.50%
</TABLE>

The Investment Advisory Agreements we entered into with each Fund do not limit
how much the Funds pay in monthly expenses each year.

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

BANKERS TRUST'S PRINCIPAL OFFICES
are located at 130 Liberty St.,
New York, New York, 10006.

6
<PAGE> 9
- --------------------------------------------------------------------------------

However, we voluntarily limit the Funds' monthly expenses as follows:

If a Fund's average monthly expenses, when annualized, are more than 2% of the
Fund's estimated average daily net assets, we will pay the difference. As a
result the Fund's yield or total return will increase. If VALIC decides to stop
voluntarily reducing a Fund's expenses, it may do so by giving 30 days' notice,
in writing, to the Series Company. To date, VALIC has not had to reduce expenses
of any Fund as a result of this 2% voluntary reduction.

For the fiscal year ended May 31, 1998, the total expenses paid by the Series
Company of each Fund's average net assets were, as a percentage, as follows:

<TABLE>
<CAPTION>
TOTAL
EXPENSES
FUND NAME RATIO
--------- --------
<S> <C>
International Equities Fund 0.40%
MidCap Index Fund 0.36%
Stock Index Fund 0.31%
Money Market Fund 0.54%
</TABLE>

THE SUB-ADVISER

According to the agreement we have with the Sub-adviser, we pay them directly
out of the fee we receive from the Funds. The Funds do not pay the Sub-adviser
directly. We pay them a percentage of what is paid to us by the Funds. We and
the Sub-adviser may agree to change the amount of money we pay them when their
agreement is renewed each year. Any such change increasing the charge would have
to be approved by the Series Company Board of Directors and by the shareholders
of the Fund.

Under the Investment Sub-Advisory Agreement we have with Bankers Trust, we pay
to Bankers Trust a monthly fee based on the respective average daily net asset
values of the MidCap Index Fund at an annual rate of 0.03% on the first $300
million and 0.02% on assets over $300 million and the Stock Index Fund at an
annual rate of 0.02% on the first $2 billion and 0.01% on assets over $2
billion. For more information on what the Sub-adviser is paid, see the
"Investment Sub-Advisers" section in the Statement of Additional Information.

According to the agreement we have with the Sub-adviser, we will receive
investment advice for each sub-advised Fund. Under this agreement we give the
Sub-adviser the authority to manage these Funds and to buy and sell securities
for these Funds. We retain the responsibility for the overall management of
these Funds. The Sub-adviser may buy and sell securities for each Fund with
broker-dealers and other financial intermediaries that they select.

The Sub-adviser may place orders to buy and sell securities of these Funds with
a broker-dealer affiliated with the Sub-adviser as allowed by law. This could
include any affiliated futures commission merchants.

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

The Securities Exchange Act of 1934 prohibits members of national securities
exchanges from effecting exchange transactions for accounts that they or their
affiliates manage, except as allowed under rules adopted by the Securities and
Exchange Commission ("SEC"). The Series Company and the Sub-adviser have entered
into a written contract, as required by the 1940 Act, to allow the Sub-adviser's
affiliate to effect these type of transactions for commissions. The 1940 Act
generally prohibits the Sub-adviser or the Sub-adviser's affiliate, acting as
principal, from engaging in securities transactions with a Fund, without an
exemptive order from the SEC.

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

ABOUT THE BOARD OF DIRECTORS

The Series Company Board of Directors currently consists of eight members: five
are independent directors and three are VALIC employees.

The Board of Directors may change each Fund's investment objective, investment
policies and non-fundamental investment restrictions without shareholder
approval. The Board may not change any fundamental restrictions placed on the
types of investments each Fund may buy. The fundamental restrictions appear in
the Statement of Additional Information. Changes to these restrictions may be
made with shareholder approval only.

7
<PAGE> 10

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

GROWTH, INCOME AND STABILITY CATEGORIES

The Funds offered in this prospectus fall into two general investment
categories: growth and stability.

GROWTH CATEGORY

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

Series Company Growth Category includes:

International Equities Fund
MidCap Index Fund
Stock Index Fund

STABILITY CATEGORY

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

Series Company Stability Category includes:

Money Market Fund

ABOUT LEVEL OF RISK

The risks involved in each Fund are described in each Fund's Fact Sheet. These
risks include market risk, credit risk, interest rate risk and risk associated
with foreign securities. These risks are described in the "Types of Investments"
section in this prospectus. The money you invest in the Series Company is not
insured. And, we can't guarantee that any of the Funds will meet their
investment objectives. There's a chance you may lose money and end up with less
than you invested.

ABOUT PORTFOLIO TURNOVER

Portfolio turnover occurs when a Fund sells its investments and buys new ones.
In some Funds, high portfolio turnover occurs when these Funds sell and buy
investments as part of their investment strategy. In other Funds, like the Index
Funds discussed below, portfolio turnover is lower because the make up of the
index stays fairly constant.

High portfolio turnover may cause a fund's expenses to increase. For example, a
fund may have to pay brokerage fees and other related expenses.

For each of the last two fiscal years the portfolio turnover rates for each of
the Funds except the Money Market Fund were as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDING
-------------------
MAY 31, MAY 31,
1997 1998
------- -------
<S> <C> <C>
International Equities
Fund................. 12% 9%
MidCap Index Fund...... 19% 26%
Stock Index Fund....... 3% 3%
</TABLE>

A portfolio turnover rate over 100% a year is higher than the rates of many
other mutual fund companies. A high rate increases a Fund's transaction costs
and expenses.

Until June 1, 1998, excessive short-term trading could result in excessive
"short-short income" under the Internal Revenue Code ("Code") which could affect
a Fund's status as a regulated investment company (RIC) under the Code. Failure
of a Fund to qualify as a RIC could cause the separate accounts investing in the
Fund to be nondiversified under Section 817[h] of the Code. The "short-short
income" test was recently repealed by the Taxpayer Relief Act of 1997, effective
for a Fund beginning on June 1, 1998. See "Dividends and Capital Gains,"
"Diversification" and "Taxes" in this prospectus for a fuller discussion of
certain of these tax provisions.

ABOUT FUND PERFORMANCE

From time to time the Series Company may advertise Fund performance information
such as Fund average total return and index total return. Current Fund
performance and information as to how this Fund performance information is
calculated appears in the Statement of Additional Information. Additionally,
information on separate account performance appears in your contract prospectus.

8
<PAGE> 11

ABOUT INDEX EQUITY FUNDS
- --------------------------------------------------------------------------------

Three of the four Funds in this prospectus are Index Equity Funds investing
mostly in stocks. Their investment strategy is to track the performance of a
specific index. This strategy is followed whether markets go up or down. As part
of this investment strategy, each Fund may also invest in futures contracts and
options. Because these Funds do not have a defensive investment strategy, when
the market goes down, you will bear the risk of such market decline.

Index Funds perform best over the long term. This means you should plan to keep
your money in an Index Fund for a period of years.

WHAT IS AN INDEX?

An index reflects the average performance of a particular class of securities.
Examples of indexes include large company stocks (S&P 500 Index), mid-size
company stocks (S&P MidCap 400 Index), the bond market, or stocks of companies
in specific industries. Indexes are not managed funds, and cannot be bought.
Investment advisers compare the results of the funds they manage to indexes that
are close to the investment style of the fund. Information about the Series
Company's use of Standard & Poor's Indexes is in the Statement of Additional
Information.

WHICH INDEXES DO THESE FUNDS TRY TO TRACK?

While there are more than a hundred different indexes, the Index Funds in this
prospectus try to track four very prominent stock indexes:

The Stock Index Fund tracks the Standard & Poor's 500 Stock Index(R)*

The Standard & Poor's 500 Stock Index(R) (S&P 500) tracks the common stock
performance of large U.S. companies in the manufacturing, utilities,
transportation, and financial industries. These companies are usually listed on
the New York Stock Exchange. It also tracks performance of common stocks sold by
foreign and smaller U.S. companies in similar industries. The smaller U.S.
companies are usually listed on the American Stock Exchange. In total, this
index tracks 500 common stocks.

This index may periodically change some of the stocks it tracks. And, different
indexes sometimes track some of the same stocks. For example, as of May 31,
1998, this Index was tracking 18 of the same stocks tracked by the Russell 2000
Index.

The MidCap Index Fund tracks the
Standard & Poor's MidCap 400(R) Index*

The Standard & Poor's MidCap 400(R) Index (S&P MidCap 400) tracks the common
stock performance of 400 medium capitalized U.S. and foreign companies that are
in the manufacturing, utilities, transportation, and financial industries. The
average market capitalization of the S&P MidCap 400 Index was $3.4 billion as of
May 31, 1998.

Standard & Poor's created this Index in 1991 to give investors an idea of how
the stocks of medium capitalized companies generally perform.

Standard & Poor's may periodically change some of the stocks in the index. And,
different indexes sometimes include some of the same stocks. For example, as of
May 31, 1998, this Index was tracking 130 of the same stocks tracked by the
Russell 2000 Index. This Index does not track the same stocks as the S&P 500
Index.

The International Equities Fund tracks The Morgan Stanley Capital International,
Europe, Australia and the Far East (EAFE) Index.

The EAFE Index tracks the performance of about 1,000 common stocks of companies
in 20 foreign countries. This index provides a measure of the performance of
companies in the more developed countries in Europe, Australia and the Far East.

Morgan Stanley publishes the EAFE Index daily and, at times, may change some of
the stocks in the index.

HOW CLOSELY CAN INDEX FUNDS TRACK THE PERFORMANCE OF THEIR INDEX?

The factors that cause a Fund to perform differently from the Index it tries to
track are called tracking differences. There is no assurance that an Index Fund
can track its index.

The coefficient of correlation (r) is an index number which shows how closely
two variables are related. If r = 0 there is no tendency for one variable to
change with the other. A value of +1 means that one variable will vary exactly
with the other. Index funds try to keep their coefficient of correlation as
close to 1 as possible. As a practical matter, any coefficient above 0.95, when

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

* "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "S&P MidCap 400(R)" are
trademarks of Standard & Poor's ("S&P"). Neither the MidCap Index Fund nor the
Stock Index Fund is sponsored, endorsed, sold or promoted by S&P, and S&P
makes no representation regarding the advisability of investment in these
Funds.

9
<PAGE> 12
- --------------------------------------------------------------------------------

measured against the comparison index, shows good tracking.

The index may remove one stock and substitute another requiring the Sub-adviser
of the Fund to do the same. When a stock is sold and the new stock purchased,
the Fund incurs transaction costs. The index incurs no transaction costs.
Therefore, the portfolio manager cannot match exactly the performance of an
index.

Also, it may not be possible for a Fund to buy every stock in its index or in
the same proportions. Fund portfolio managers may rely on a statistical
selection technique to figure out, of the stocks tracked by their index, how
many and which ones to buy. Stocks are bought and sold when they are added to or
dropped from the Index. This keeps brokerage fees and other transaction costs
low. For more information, see the "Investment Strategy" sections on each Fund's
Fact Sheet.

10
<PAGE> 13

HOW TO READ A FUND FACT SHEET
- --------------------------------------------------------------------------------

FACT SHEET DESCRIPTION

11
<PAGE> 14

INTERNATIONAL EQUITIES
FUND
Fact Sheet
- -------------------------------------------------
Investment Goal GROWTH THROUGH
INVESTMENTS TRACKING
THE EAFE INDEX
- -------------------------------------------------
Investment Category GROWTH

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

INVESTMENT ADVISER
VALIC

PORTFOLIO MANAGER: This Fund attempts to track the performance of the EAFE
Index. William Trimbur, Jr. has been this Fund's Portfolio Manager since 1992.
He has been Vice President and Investment Officer for the Series Company since
1987.

INVESTMENT OBJECTIVE
Seeks to provide long-term growth of capital through investments primarily in a
diversified portfolio of equity and equity related securities of foreign issuers
that, as a group, are expected to provide investment results closely
corresponding to the performance of the EAFE Index.

INVESTMENT RISK
As described in the Investment Strategy section below, this Fund invests almost
all its assets in foreign securities, which have risks that U.S. investments
don't have. For a further explanation of the risks associated with foreign
securities and market risk, see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund invests in a sampling of about 100 foreign stocks of companies that are
either in the EAFE Index or are similar to stocks in the EAFE Index. These
stocks, as a group, should reflect EAFE's performance. Since it may not be
possible for this Fund to buy every stock included in this index or in the same
proportions, we buy as many stocks as are needed to closely track the
performance of the EAFE Index.

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

<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Assets*
- ----------------------------------------------------
<S> <C>
Stocks in the EAFE Index at least 65%**
- ----------------------------------------------------
Other investments not in no more than 35%
EAFE Index
Foreign equity and
related securities
including common
stocks, convertible
stocks, preferred stocks
and warrants
- ----------------------------------------------------
Futures and options no more than 33%
Covered put and call
options on foreign
currencies
Listed and unlisted put
and call options on
currency futures
Listed and unlisted
foreign currency
contracts
- ----------------------------------------------------
High quality foreign and up to 100%
domestic money market
securities**
- ----------------------------------------------------
Illiquid and restricted no more than 10%
securities
- ----------------------------------------------------
*At time of purchase.
**It is possible we may invest up to 100% of the
Fund's assets in short term, high quality, foreign
and domestic money market securities when we think
economic, political and market conditions in
foreign countries make it too risky to follow our
general guidelines.
</TABLE>

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

12
<PAGE> 15

INTERNATIONAL EQUITIES FUND
Fact Sheet
- --------------------------------------------------------------------------------

For the fiscal year ended May 31, 1998, the Fund had a return of 10.32% before
subtracting expenses of 0.40%. This return represented a negative tracking
difference of 0.79% compared to the EAFE Index. The underperformance resulted
from low exposure to smaller capitalization stocks which did well in early 1998.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE INTERNATIONAL EQUITIES FUND AND
THE EAFE INDEX

AVERAGE ANNUAL TOTAL RETURN -- FUND

<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------
1 YEAR 5 YEAR SINCE INCEPTION*
- -----------------------------------------------------------------
9.92% 9.56% 5.04%
- -----------------------------------------------------------------
</TABLE>

[CHART]

FISCAL YEAR ENDED MAY 31

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

13
<PAGE> 16

MIDCAP INDEX FUND
Fact Sheet

<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal: GROWTH THROUGH INVESTMENTS
TRACKING THE S&P 400 MIDCAP
INDEX
- -------------------------------------------------
Investment Category: GROWTH
</TABLE>

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

INVESTMENT ADVISER

VALIC

INVESTMENT SUB-ADVISER

Bankers Trust

INVESTMENT OBJECTIVE

Seeks to provide growth of capital through investments primarily in a
diversified portfolio of common stocks that, as a group, are expected to provide
investment results closely corresponding to the performance of the S&P MidCap
400 Index.

INVESTMENT RISK

The S&P MidCap 400 Index includes the stocks of many medium sized companies.
These companies usually do not have as much financial strength as very large
companies and so may not be able to do as well in difficult times. However,
because they are medium sized, they have more potential to grow, which means the
value of their stock may increase. The S&P MidCap 400 Index also includes stocks
of certain medium sized foreign companies. These stocks can be more risky than
large company stocks. An index fund holding nearly all of the 400 stocks in the
S&P MidCap 400 Index avoids the risk of individual stock selection and seeks to
provide the return of the medium-sized company sector of the market. On average
that return has been positive over many years but can be negative at certain
times. There is no assurance that a positive return will occur in the future.

Because this Fund invests in many of the stocks tracked by this Index, your
investment will experience similar changes in value and share similar risks such
as market risk and risk associated with foreign securities. For more information
about market risk and risk associated with foreign securities, see "A Word About
Risk" in this prospectus.

INVESTMENT STRATEGY

The Fund invests in a sampling of stocks in the index that, as a group, should
reflect its performance. The stocks of the S&P 400 MidCap Index to be included
in the Fund will be selected utilizing a statistical sampling technique known as
"optimization." This process selects stocks for the Fund so that various
industry weightings, market capitalizations and fundamental character-istics
(e.g. price-to-book, price-to-earnings, debt-to-asset ratios and dividend
yields) closely approximate those of the S&P 400 MidCap Index. The stocks held
by the Fund are weighted to make the Fund's aggregate investment characteristics
similar to those of the Index as a whole. Since it may not be possible for this
Fund to buy every stock included on this index or in the same proportions, we
rely on the aforementioned statistical technique to figure out, of the stocks
tracked by the index, how many and which ones to buy.

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

<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Assets*
- -------------------------------------------
<S> <C>
Stocks in the S&P MidCap at least 65%
400 Index
- -------------------------------------------
Foreign stocks (listed no more than 20%
and over-the-counter)
in the S&P MidCap 400
Index
- -------------------------------------------
Futures and options no more than 33%
- -------------------------------------------
Investments not in the no more than 35%
S&P
MidCap 400 Index
Common stock and
related securities
High quality money
market securities
Illiquid and restricted
securities
- -------------------------------------------
</TABLE>

* At time of purchase.

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

14
<PAGE> 17

MIDCAP INDEX FUND
Fact Sheet
- --------------------------------------------------------------------------------

For the fiscal year ended May 31, 1998, the Fund had a return of 29.98%, before
subtracting expenses of 0.36%. This represented a positive tracking difference
of 0.11% compared to the S&P MidCap 400 Index. The close tracking was the result
of low cost trading techniques, and the use of futures to maintain a fully
invested position.

COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE MIDCAP INDEX FUND AND
THE S&P MIDCAP 400 INDEX

AVERAGE ANNUAL TOTAL RETURN -- FUND

<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------
1 YEAR 5 YEAR SINCE 10/1/91*
- -----------------------------------------------------------------
29.62% 17.99% 17.61%
- -----------------------------------------------------------------
</TABLE>

[CHART]

FISCAL YEAR ENDED MAY 31

* Effective October 1, 1991, the Fund's name was changed
from the Capital Accumulation Fund to the MidCap Index
Fund. Additionally, the investment objectives and
investment program for the Fund were changed.

15
<PAGE> 18

MONEY MARKET FUND
Fact Sheet

<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal INCOME THROUGH INVESTMENT IN
SHORT-TERM MONEY MARKET
SECURITIES
- -------------------------------------------------
Investment Category STABILITY
</TABLE>

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

INVESTMENT ADVISER

VALIC

PORTFOLIO MANAGER

Teresa Moro has been this Fund's Portfolio Manager and Vice President and
Investment Officer for the Series Company since 1991. From 1986 to 1991, Ms.
Moro was an Assistant Vice President and Money Market Trader for the Fund.

INVESTMENT OBJECTIVE

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

INVESTMENT RISK

The short-term money market securities that this Fund invests in are high
quality investments, posing low credit and interest rate risk. The current yield
of the Fund will generally go up or down with changes in the level of interest
rates. The Fund uses the amortized cost method to value its portfolio securities
and tries to keep its net asset value at $1.00 per share. There can be no
assurance that the net asset value will be $1.00 per share at all times.

Because the risk to the money you invest is low, the potential for profit is
also low. The Fund may experience risks including interest rate risk, market
risk, credit risk and risk associated with foreign securities. For a discussion
of these risks, see "A Word About Risk" in this prospectus.

INVESTMENT STRATEGY

The Fund invests in short-term money market securities to provide you with
liquidity, protection of your investment and current income. We use 95% of the
Fund's assets to buy short-term securities that are rated within the highest
rating category for short term debt obligations by at least two nationally
recognized rating services or unrated securities of comparable investment
quality. These eligible securities must mature in 13 months or less and the Fund
must have a dollar-weighted average portfolio maturity of 90 days or less. These
practices are designed to minimize any fluctuation in the value of the Fund's
portfolio.

The investments this Fund may buy include:

- Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities

- Certificates of deposit and other obligations of domestic banks that have
total assets in excess of $1 billion

- Commercial paper sold by corporations and finance companies

- Corporate debt obligations with remaining maturities of 13 months or less

- Repurchase agreements

- Money market instruments of foreign issuers payable in U.S. dollars (limited
to no more than 20% of the Fund's net assets)

- Asset-backed securities

- Loan participations

- Adjustable rate securities

- Illiquid and restricted securities*
- ---------------

*limited to 10% of the Fund's net assets

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

16
<PAGE> 19

MONEY MARKET FUND
Fact Sheet
- --------------------------------------------------------------------------------

For the fiscal year ended May 31, 1998, the Fund had a return of 5.79%, before
subtracting expenses of 0.54%. This return represented a positive tracking
difference of 0.98% compared to the 30-Day Certificate of Deposit Primary
Offering Rate by New York City Banks.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE MONEY MARKET FUND
AND THE NYC 30 DAY CD RATE

AVERAGE ANNUAL TOTAL RETURN -- FUND

[CHART]

17
<PAGE> 20

STOCK INDEX FUND
Fact Sheet

<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal GROWTH THROUGH INVESTMENTS
TRACKING THE S&P 500 INDEX
- -------------------------------------------------
Investment Category GROWTH
</TABLE>

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

INVESTMENT ADVISER

VALIC

INVESTMENT SUB-ADVISER

Bankers Trust

INVESTMENT OBJECTIVE

Seeks long-term capital growth through investment in common stocks that, as a
group, are expected to provide investment results closely corresponding to the
performance of the S&P 500 Index.

INVESTMENT RISK

The S&P 500 Index includes the stocks of many large, well-established companies.
These companies usually have the financial strength to weather difficult
financial times. However, the value of any stock can rise and fall over short
and long periods of time. This Fund which holds nearly all of the 500 stocks in
the S&P 500 Index avoids the risk of individual stock selection and seeks to
provide the return of the large company sector of the market. In the past that
return has been positive over many years but can be negative at certain times.
There is no assurance that a positive return will occur in the future.

Because the Fund invests in many of the stocks tracked by this Index, your
investment will experience similar changes in value and share similar risks,
such as market risk and risk associated with foreign securities. For more
information about market risk and risk associated with foreign securities, see
"A Word About Risk" in this prospectus.
INVESTMENT STRATEGY

The Fund invests in a sampling of stocks in the index that, as a group, should
reflect its performance. The stocks of the S&P 500 Index to be included in the
Fund will be selected utilizing a statistical sampling technique known as
"optimization." This process selects stocks for the Fund so that various
industry weightings, market capitalizations and fundamental
characteristics (e.g. price-to-book, price-to-earnings, debt-to-asset ratios and
dividend yields) closely approximate those of the S&P 500 Index. The stocks held
by the Fund are weighted to make the Fund's aggregate investment characteristics
similar to those of the Index as a whole. Since it may not be possible for this
Fund to buy every stock included on this index or in the same proportions, we
rely on the aforementioned statistical technique to figure out, of the stocks
tracked by the index, how many and which ones to buy.

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

<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Assets*
- -------------------------------------------
<S> <C>
Stocks in the S&P 500 at least 65%
Index
- -------------------------------------------
Foreign stocks (listed no more than 20%
and over-the-counter)
in the
- -------------------------------------------
Futures and options no more than 33%
- -------------------------------------------
Investments not in the no more than 35%
S&P 500 Index
Common stock and related
securities
High quality money market
securities
Illiquid and restricted
securities
- -------------------------------------------
</TABLE>

* At time of purchase.

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

18
<PAGE> 21

STOCK INDEX FUND
Fact Sheet
- --------------------------------------------------------------------------------

For the fiscal year ended May 31, 1998, the Fund had a return of 30.61%, before
subtracting expenses of 0.31%. This return represented a negative tracking
difference of 0.07% compared to the S&P 500 Index(C). A combination of careful
purchasing of securities, low cost trading techniques, and the use of futures to
maintain a fully invested position resulted in the close tracking of the Index.
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE STOCK INDEX FUND AND THE S&P 500 INDEX

AVERAGE ANNUAL TOTAL RETURN -- FUND

[CHART]

FISCAL YEAR ENDED MAY 31

19
<PAGE> 22

TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------

STOCKS -- also called equity securities

If you own a share of stock, you own a part of the company that issued it.
Companies sell stock to get the money they need to grow.

There are three types of stocks:

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

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

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

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

BONDS -- also called debt securities

Bonds are sold by governments on the local, state, and federal levels, and by
companies. There are many different kinds of bonds. For example, each bond issue
has specific terms. U.S. Government bonds are guaranteed to pay interest and
principal by the federal government. Revenue bonds are usually only paid from
the revenue of the issuer. An example of that would be an airport revenue bond.
Debentures are a very common type of corporate bond (a bond sold by a company).
Payment of interest and return of principal is subject to the company's ability
to pay. Convertible bonds are corporate bonds that can be exchanged for stock.
The types of bonds the Funds may invest in are as follows: U.S. Government bonds
and investment grade corporate bonds (the Capital Conservation Fund may also
invest in below investment grade bonds). For a description of investment grade
bonds see "A Word about Risk -- Market Risk" in this prospectus.

Investing in a bond is like making a loan for a fixed period of time at a fixed
interest rate. During the fixed period, the bond pays interest on a regular
basis. At the end of the fixed period, the bond matures and the investor usually
gets back the principal amount of the bond. Fixed periods to maturity are
categorized as short term (generally less than 12 months), intermediate (one to
10 years), and long term (10 years or more).

Commercial paper is a specific type of corporate or short term note. In fact,
it's very short term, being paid in less than 270 days. Most commercial paper
matures in 50 days or less.

Bonds rated Ba or B by Moody's Investors Services, Inc. (generally known as
lower-medium and lower-quality bonds) are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and principal
in accordance with the terms of the obligation. While such bonds will likely
have some quality and protective characteristics, these are outweighed by
uncertainties or risk exposures to adverse conditions. Lower-medium and
lower-quality bonds may be more susceptible to real or perceived adverse
economic and individual corporate developments than would investment grade
bonds. For more information about bonds and ratings of bonds, see the Statement
of Additional Information.

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

ASSET-BACKED SECURITIES

Asset-backed securities are bonds or notes that are normally supported by a
specific property. If the issuer fails to pay the interest or return the
principal when the bond matures, then the issuer must give the property to the
bondholders or noteholders.

All of the Funds in this prospectus may invest in asset-backed securities.
Examples of assets supporting asset-backed securities include credit card
receivables, retail installment loans, home equity loans, auto loans, and
manufactured housing loans. For more information about asset-backed securities
see the Statement of Additional Information.

LOAN PARTICIPATIONS

A loan participation is an investment in a loan made to a U.S. company that is
secured by the company's assets. The assets must be, at all times, worth enough
money to cover the balance due on the loan. Major national and regional banks
make loans to companies and then sell the loans to investors. These banks don't
guarantee the companies will pay the principal and interest due on the loans.
For more information about loan participations see the Statement of Additional
Information.

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All the Funds in this prospectus may invest in loan participations.

MORTGAGE-RELATED SECURITIES

Mortgage-related securities include, but are not limited to, mortgage
pass-through securities, collateralized mortgage obligations and commercial
mortgage-backed securities.

Mortgage Pass-Through Securities are securities representing interests in
"pools" of mortgage loans secured by residential or commercial real property.
Payments of interest and principal on these securities are generally made
monthly, in effect "passing through" monthly payments made by the individual
borrowers on the mortgage loans which underlie the securities (net of fees paid
to the issuer or guarantor of the securities). Mortgage-related securities are
subject to interest rate risk and prepayment risk.

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

Collateralized Mortgage Obligations ("CMOs") are hybrid mortgage-related
instruments. CMOs may be collateralized by whole mortgage loans or by portfolios
of mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA. CMOs are
structured into multiple classes, with each class bearing a different stated
maturity. CMOs that are issued or guaranteed by the U.S. Government or by any of
its agencies or instrumentalities will be considered U.S. Government securities
by the Funds, while other CMOs, even if collateralized by U.S. Government
securities, will have the same status as other privately issued securities for
purposes of applying a Fund's diversification tests.

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

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

ILLIQUID AND RESTRICTED SECURITIES

An illiquid security is one that may not be frequently traded. If it must be
sold quickly, it may have to be sold at a loss. For example, if a fund owns a
stock that is not sold very often and the fund needs to sell this stock quickly,
it may have to offer the investment at a low price for someone to buy it.

A restricted security is one that has not been registered with the SEC and
therefore can't be sold in the public market. Restricted securities do include
securities eligible for resale under Rule 144A of the Securities Act of 1933.
Some Rule 144A securities may be liquid as determined by VALIC. For more
information about Rule 144A securities see the Statement of Additional
Information. These investments can be very risky because the Fund's ability to
sell a restricted stock is very limited.

All the Funds may buy illiquid and restricted securities, but are restricted as
to how much money they may invest in them. See "Limitations" below. For more
information about illiquid and restricted securities see the Statement of
Additional Information. These investments can be very risky because the Fund's
ability to sell a restricted security is very limited and Rule 144A securities
deemed to be illiquid will have the effect of increasing the amount of the
Fund's investments in illiquid securities. In addition, investing in Rule 144A
securities could have the effect of increasing the level of Fund illiquidity to
the extent that qualified institutional buyers become, for a time, uninterested
in purchasing these securities.

FOREIGN SECURITIES

All of the funds may invest in securities of foreign issuers. Such foreign
securities may be

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denominated in foreign currencies, except with respect to the Money Market Fund
which may only invest in U.S. dollar-denominated securities of foreign issuers.

Securities of foreign issuers include obligations of foreign branches of U.S.
banks and of foreign banks, common and preferred stocks, fixed income securities
issued by foreign governments, corporations and supranational organizations, and
American Depository Receipts, European Depository Receipts and Global Depository
Receipts ("ADRs", "EDRs" and "GDRs"). See "ADRs" below.

ADRS

ADRs are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank. We consider ADRs
foreign securities. ADRs in which a Fund may invest may be sponsored or
unsponsored. There may be less information available about foreign issuers of
unsponsored ADRs.

FOREIGN CURRENCY

All of the Funds, except the Money Market Fund, may buy and sell foreign
currencies the same way they buy and sell other investments. Funds buy foreign
currencies when they believe the value of the currency will increase. If it does
increase, they sell the currency for a profit. If it decreases they will
experience a loss. Funds may also buy foreign currencies to pay for foreign
securities bought for the Fund.

The Funds, except the Money Market Fund, may purchase forward foreign currency
exchange contracts to protect against a decline in the value of the U.S. dollar.
For more information about foreign currency exchange transactions, see the
Statement of Additional Information.

WHEN-ISSUED SECURITIES

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

All of the Funds may buy when-issued securities in accordance with their
investment strategy. For more information about when-issued securities, see the
Statement of Additional Information.

MONEY MARKET SECURITIES

All of the Funds may invest part of their assets in high quality money market
securities payable in U.S. dollars. A listing of the types of money market
securities in which the Money Market Fund may invest is in that Fund's Fact
Sheet. A money market security is high quality when it is rated in one of the
two highest credit categories by Moody's or Standard & Poor's or another
nationally recognized rating service or if unrated, deemed high quality by
VALIC. For more information about money market securities of foreign issuers the
Funds may purchase, see the Statement of Additional Information.

These high quality money market securities include:

- Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities

- Certificates of deposit and other obligations of domestic banks having total
assets in excess of $1 billion

- Commercial paper sold by corporations and finance companies

- Corporate debt obligations with remaining maturities of 13 months or less

- Repurchase agreements, money market securities of foreign issuers if payable
in U.S. dollars, asset-backed securities, loan participations, and
adjustable rate securities

DERIVATIVES

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

The Funds, except the Money Market Fund, may buy two types of derivatives:
futures and options.

Options

An option is the right to buy or sell any type of investment for a preset price
over a specific period of time.

Call Option

For example, you can buy an option from Mr. Smith that gives you the right to
buy 10 shares of stock X at $25.00 per share anytime between now and six weeks
from now. You believe stock X will be selling for more than $25.00 per share
between now and then. Mr. Smith believes it won't be. If you exercise this
option before it expires, Mr. Smith must sell you 10 shares of stock X at $25.00
per share.

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On the other hand, you can sell an option to Mr. Smith that gives him the right
to buy 10 shares of stock X at $25.00 per share anytime between now and six
weeks from now. You believe stock X will be selling for less than $25.00 per
share between now and then. Mr. Smith believes it won't be. If he exercises this
option before it expires, you must sell to Mr. Smith 10 shares of stock X at
$25.00 per share.

Put Option

Or, you can buy an option from Mr. Smith that gives you the right to sell him 10
shares of X stock at $25.00 per share anytime between now and six weeks from
now. In this example, you believe stock X will be selling for less than $25.00
per share between now and then. Mr. Smith thinks it will be selling for more.
Or, you can sell an option to Mr. Smith that gives him the right to sell to you
10 shares of X stock at $25.00 per share anytime between now and six weeks from
now. In this example, he believes stock X will be selling for less than $25.00
per share between now and then.

Futures Contracts

A futures contract is an agreement between a buyer and a seller to buy or sell
an investment on a future date at a price the buyer and seller set today. The
buyer thinks the price will go up between now and then, and the seller thinks
the price will go down or they may just want to receive today's price because
they do not know which way prices are going to go.

All of the Funds, except the Money Market Fund, may enter into certain types of
futures contracts. The Funds use futures contracts as a tool to earn more money,
and to protect against rising or falling prices in the stock and bond markets.

The Funds use stock and bond futures to invest cash and cash equivalents. When
certain levels are reached the Fund will sell the futures and buy stocks or
bonds. For more information on put and call options and financial futures
contracts and options, see the Statement of Additional information.

All of the Funds, except the Money Market Fund can invest in these types of
futures and options:

- Write exchange traded covered put and call options on securities and stock
indices.

- Purchase exchange traded put and call options on securities and stock
indices.

- Purchase and sell exchange traded financial futures contracts.

- Write covered call options and purchase exchange traded put and call options
on financial futures contracts.

- Write covered call options and purchase non-exchange traded call and put
options on financial futures contracts.

The International Equities Fund may write and purchase put and call options on
securities and stock indices that are not traded on an exchange.

REPURCHASE AGREEMENTS

A repurchase agreement requires the seller of the security to buy it back at a
set price at a certain time. If a Fund enters into a repurchase agreement, it is
really making a short term loan (usually for one day to one week). The Funds may
enter into repurchase agreements only with well-established securities dealers
or banks that are members of the Federal Reserve System. All the Funds in this
prospectus may invest in repurchase agreements.

The risk in a repurchase agreement is the failure of the seller to be able to
buy the security back. If the value of the security declines, the Fund may have
to sell at a loss.

A repurchase agreement of more than 7 days duration is illiquid. A discussion of
repurchase agreements, illiquid securities and Fund limitations is contained in
the Statement of Additional Information.

A WORD ABOUT RISK

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

- Market Risk

- Credit (Financial) Risk

- Interest Rate Risk

- Risk Associated with Foreign Securities

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

MARKET RISK

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

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CREDIT (FINANCIAL) RISK

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

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

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

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

INTEREST RATE RISK

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

RISK ASSOCIATED WITH FOREIGN SECURITIES

Each of the Funds may, subject to limits stated in each Fund's Fact Sheet,
invest in foreign securities including ADRs. A foreign security is a security
issued by an entity domiciled or incorporated outside of the U.S.

There are three principal risks of owning foreign securities:

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

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

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

INVESTMENT PRACTICES

Limitations

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

For example, the Stock Index Fund's investment goal is growth through
investments tracking the S&P 500 Index, an index that includes stocks of
domestic and foreign companies. As a result, this Fund may invest no more than
35% of its assets in stocks that are not part of the S&P 500 Index.

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

Each Fund's limitations are shown in the Investment Strategy section of its Fact
Sheet.

Lending Portfolio Securities

Each Fund may lend up to 30% of its total assets to broker-dealers and other
financial institutions to earn more money for the Fund. Assets are placed in a
special account by the borrower to cover the market value of the securities on
loan. The assets serving as collateral for the loan are valued daily.

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

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

For more information about
LENDING PORTFOLIO SECURITIES,
FOREIGN SECURITIES, AND
INVESTMENT LIMITATIONS, see the
Statement of Additional
Information.

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<PAGE> 27

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

SERIES COMPANY SHARES

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

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

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

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

The Variable Annuity Marketing Company (VAMCO) acts as the Series Company's
distributor. As distributor, VAMCO sells shares of the Funds to the separate
accounts. VAMCO is a wholly owned subsidiary of VALIC and acts as a distributor
under an agreement it has with the Series Company. VAMCO does not charge the
Series Company or the separate accounts for its services. Also, VAMCO is not
required to sell a minimum number of shares to the separate accounts.

VAMCO sends orders to buy, sell or transfer shares to the Series Company's
transfer agent daily. The price of any share affected by the request is the next
net asset value calculated after order is received.

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

NET ASSET VALUE OF THE SERIES COMPANY SHARES

How Net Asset Value is Calculated

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

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

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

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

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

When Net Asset Value is Calculated

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

The separate accounts can buy, sell, and transfer shares in the Funds only on
days that the Series Company calculates the net asset value of each Fund's
shares. Through VAMCO, the separate accounts send orders to the Series Company
to buy, sell, or transfer shares based on requests they receive from
participants.

DIVIDENDS AND CAPITAL GAINS

Dividends from Net Investment Income

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

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Fund pays dividends daily and all other Funds pay dividends once a month.

Distributions from Capital Gains

When a Fund sells a security for more than it paid for that security, a capital
gain results. Once a year, each Fund pays distributions from capital gains, as
long as total capital gains exceed total capital losses. Distributions from
capital gains are automatically reinvested for you into additional shares of the
Fund.

DIVERSIFICATION

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

All of the Funds may invest up to 5% of their total assets in a single issuer.
An issuer, or "company" does not include the U.S. Government or agencies of the
U.S. Government according to the Code and the 1940 Act. For diversification
purposes, repurchase agreements are considered to be issued by the U.S.
Government if backed by U.S. Government securities. Also, these Funds may not
own more than 10% of the voting securities of a company.

The Money Market Fund may not invest more than 5% of its total assets in any
company rated as "second tier" by a national rating service (as described in
Types of Investments).

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

TAXES

By paying out all earnings as described in the Dividends and Capital Gains
section above and by complying with the diversification requirements under the
Code, each Fund expects to qualify as a Registered Investment Company (RIC)
under Subchapter M of the Code. By qualifying as a RIC the Fund will not have to
pay federal income taxes.

VOTING RIGHTS

One Vote Per Share

Each outstanding share has one vote on all matters that shareholders vote on. As
a participant, you vote on these matters indirectly by voting your units. The
way you vote your units as a participant depends on your contract. See your
contract prospectus for specific details.

When a matter comes up for vote, the separate account will vote its shares in
the same proportion as the unit votes it actually receives. If VALIC determines
that it may, under the current interpretation of the 1940 Act, vote shares
directly instead of voting through its units, it may decide to vote that way.

Shareholder Meetings

Maryland law does not require the Series Company to hold regular, annual
shareholder meetings. But, the Series Company must hold shareholder meetings on
the following matters:

- to approve certain agreements as required by the 1940 Act;

- to change fundamental investment objectives in the Diversification section
and to change fundamental investment restrictions, above;

- to fill vacancies on the Series Company's Board of Directors if the
shareholders have elected less than a majority of the Directors.

Shareholders may call a meeting to remove a Director from the Board if at least
10% of the outstanding shares vote to have this meeting. Then, at the meeting,
at least 2/3 of all the outstanding shares of all the Funds must vote in favor
of removing the Director.

Shareholder Communications

The Series Company will assist in shareholder communications.

YEAR 2000 RISKS

VALIC is in the process of modifying its systems to achieve Year 2000 readiness.
This endeavor is directed and managed by VALIC and monitored by the parent
company, American General Corporation. VALIC has developed clearly defined and
documented plans that have been implemented to minimize the risk of significant
negative impact on its operations.

These plans include the following activities: (1) perform an inventory of
VALIC's information technology and non-information technology systems; (2)
assess which items in the inventory may expose VALIC to business interruptions
due to Year 2000 issues; (3) test systems for Year 2000 readiness; (4) reprogram
or replace systems that are not Year 2000 ready; and (5) return the systems to
operation. VALIC expects to complete the forgoing activities for all critical
business systems relevant to the Series Company by December 1998. Accordingly,
VALIC has no contingency plans because any open Year 2000 issues may be
addressed in 1999.

In addition, the Series Company and VALIC have business relationships with
various third

26
<PAGE> 29
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parties, each of which must also be Year 2000 ready. Therefore, VALIC's plans
also include assessing and attempting to mitigate the risks associated with the
potential failure of third parties to achieve Year 2000 readiness. Due to the
various stages of the third parties' Year 2000 readiness, VALIC's efforts in
this regard will extend through 1999.

Through June 30, 1998 VALIC has incurred and expensed $13 million (pretax)
related to Year 2000 readiness, including $6.5 million incurred during the first
six months of 1998. VALIC currently anticipates that it will incur future costs
of $3 million (pretax) for additional internal staff, third party vendors, and
other expenses to achieve Year 2000 readiness.

Due to the magnitude and complexity of this project, risks and uncertainties
exist. If conversion of VALIC's systems is not completed on a timely basis (due
to non-performance by significant third-party vendors or other unforeseen
circumstances), or if significant third parties fail to achieve Year 2000
readiness on a timely basis, the Year 2000 issue could have a material adverse
impact on the operations of VALIC and the Series Company.

EURO CONVERSION

The planned introduction of a single European currency, the Euro, on January 1,
1999 for participating European nations in the Economic and Monetary Union (EMU)
presents unique risks and uncertainties for investors in those countries. The
European Union currently consists of: Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal,
Spain, Sweden and the United Kingdom. The risks associated with the introduction
of the Euro include: (i) whether the payment and operational systems of banks
and other financial institutions will be ready by the scheduled launch date;
(ii) the creation of suitable clearing and settlement payment schemes for the
Euro; (iii) the legal treatment of outstanding financial contracts after January
1, 1999 that refer to existing currencies rather than the Euro; (iv) the
fluctuation of the Euro relative to non-Euro currencies during the transition
period from January 1, 1999 to December 31, 2000 and beyond; and (v) whether the
interest rate, tax and labor regimes of the European countries participating in
the Euro will converge over time. Further, the conversion of the currencies of
other EMU countries, such as the United Kingdom, and the admission of other
countries, including Central and Eastern European countries, to the EMU could
adversely affect the Euro. These or other factors may cause market disruptions
before or after the introduction of the Euro and could adversely affect the
value of foreign securities and currencies held by the Funds. The Euro
conversion also raises tax issues such as whether the conversion of a non-Euro
currency to the Euro creates a "realization event" for a financial instrument
denominated in the non-Euro currency and the appropriate time to recognize any
gain or loss. Depending on how the tax authorities rule on these issues, the
Euro conversion may result in taxable gain or loss on non-Euro denominated
instruments that have not been sold by the Funds at the time of conversion.

Additionally, while it is not possible to predict the impact of the Euro
implementation plan on the Funds, the transition to the Euro may change the
economic environment and behavior of investors, particularly in European
markets. For example, investors may begin to view those countries participating
in the EMU as a single entity, and VALIC and the Sub-advisers may need to adapt
their investment strategies accordingly. The process of implementing the Euro
also may adversely affect financial markets world-wide and may result in changes
in the relative strength and value of the U.S. dollar or other major currencies.
Also, the transition to the Euro is likely to have a significant impact on
fiscal and monetary policy in the participating countries and may produce
unpredictable effects on trade and commerce generally. These resulting
uncertainties could create increased volatility in financial markets world-wide.

REPORTS

The Series Company sends Annual Reports containing audited financial statements,
Semi-Annual Reports containing unaudited financial statements, and proxy
materials to Contract owners or participants. Also, the Series Company includes
an Annual Report with each Statement of Additional Information it sends out.

If you have any questions about the Annual or Semi-Annual Reports, call or write
to the Series Company at the phone number/address found on the cover page of
this prospectus.

27
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INVESTMENT ADVISER:
The Variable Annuity Life Insurance Company
2929 Allen Parkway
Houston, Texas 77019

INVESTMENT SUB-ADVISERS:
Bankers Trust Company
One Bankers Trust Plaza
130 Liberty St., 36th Floor
New York, New York 10006

DISTRIBUTOR:
The Variable Annuity Marketing Company
2929 Allen Parkway
Houston, Texas 77019
CUSTODIAN:
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INDEPENDENT AUDITORS:
Ernst & Young LLP
1221 McKinney, Suite 2400
Houston, Texas 77010
TRANSFER AND SHAREHOLDER SERVICE AGENT:
The Variable Annuity Life Insurance Company
2929 Allen Parkway
Houston, Texas 77019

DIRECTORS AND OFFICERS

<TABLE>
<S> <C> <C>
DIRECTORS OFFICERS
Norman Hackerman Thomas L. West, Jr. Chairman
John Wm. Lancaster John A. Graf President
Ben H. Love Craig R. Rodby Executive Vice President
Joe C. Osborne Michael G. Atnip Executive Vice President
F. Robert Paulsen Joe C. Osborne Executive Vice President
Peter V. Tuters Peter V. Tuters Senior Investment Officer
R. Miller Upton Maruti D. More Vice President -- Investments
Thomas L. West, Jr. Teresa S. Moro Vice President and Investment Officer
Leon A. Olver Vice President and Investment Officer
William Trimbur, Jr. Vice President and Investment Officer
Brent C. Nelson Vice President
Cynthia A. Toles Vice President and Secretary
Nori L. Gabert Vice President and Assistant
Cynthia A. Gibbons Secretary
Gregory R. Seward Assistant Vice President
Jaime M. Sepulveda Treasurer
Earl E. Allen, Jr. Assistant Treasurer
Kathryn A. Pearce Assistant Treasurer
Donna L. Hathaway Controller
Assistant Controller
</TABLE>

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